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All Contents © 2016The Kiplinger Washington Editors
Without even knowing it you might be doing things that are damaging your credit score, which affects your ability to get credit and the interest rate you pay when you do get credit. A 2014 survey by Credit.com found that consumers sometimes don’t understand which actions will and will not help them improve their credit scores.
So how do you identify and put an end to credit-damaging habits and start forming credit-boosting habits? Start by understanding the basics. The FICO credit score is the most widely used score in lending decisions and ranges from 300 to 850. A FICO score of 750 to 850 is considered excellent, and those with a score in that range have access to the lowest rates and best loan terms, according to myFICO.com, the consumer division of FICO. The three credit bureaus – Equifax, Experian and TransUnion – also have created the VantageScore, which ranges from 501 to 990, and the VantageScore 3.0, which ranges from 300 to 850 (to mimic the FICO range).
Once you know your score, you can start taking the right steps to improve it. To do so, follow these seven habits of people with excellent credit scores.
By Cameron Huddleston, Online Editor
| January 2015
Payment history is the top factor in most credit scoring models, says Gerri Detweiler, director of consumer education at Credit.com. So payments that are 30 days or more late can quickly drag down your credit score. And one late payment is enough to hurt your score, she says. According to myFICO.com, 96% of consumers with a credit score of 800 pay credit accounts on time; 68% of those with a score of 650 have accounts past due.
Even if you can only afford to pay the minimum, always pay on time because that will have a bigger impact on your score than the amount you pay, Detweiler says. Set up automatic bill pay through your credit account or bank account so you don’t miss a payment.
Usually the second most important factor in your credit score is how much debt you have compared with the amount of available credit you have, Detweiler says. Those with a credit score of 800 use only 7% of their available credit, on average, according to myFiCO.com. But most consumers with a score of 650 have maxed out their available credit.
You can see a significant increase in your credit score shortly after you pay down highly utilized credit accounts, Detweiler says. If your credit cards are maxed out and you can’t pay them off quickly, she recommends consolidating your balances with a personal loan from a bank because the so-called credit utilization ratio (total credit balance divided by total credit limit) for those loans isn’t calculated in the same way and doesn’t weigh heavily on your score.
People with excellent credit almost always keep low balances on their credit cards, and often don’t pay interest because they pay their balances in full every month, says Jason Steele, a credit card expert for CompareCards.com. In other words, they only use cards for things they can afford to pay off with cash, he says. Those with a credit score of 800 owe less than $3,500, on average, on their cards; whereas, those with a score of 650 owe more than $4,500, on average, on their cards, according to myFICO.com.
To become disciplined with credit and avoid racking up balances, Steele recommends that you log into your credit account online after making a purchase to pay it off. If you’re already carrying a balance, see How to Pay Off Your Credit-Card Debt in a Year for steps to pay off what you owe.
Those with a credit score of 800 have an average account history of 11 years (with oldest account opened 25 years ago) versus an average account history of seven years (with the oldest account opened 11 years ago) for those with a score of 650, according to myFICO.com. So opening several new accounts at once can shorten the average age of your credit history, Detweiler says. And closing old, inactive accounts also can hurt. This move can increase your credit utilization ratio since closing an account means you no longer have access to that available credit.
It’s important to have a healthy mix of lines of credit, including credit cards, auto loans, mortgages and even personal loans, Steele says. This shows that lenders are willing to trust you with their loans. And the more available credit you have, the lower your credit utilization ratio will be, he says.
But that doesn’t mean you should apply for every line of credit you’re offered. Multiple inquiries from lenders about your credit in a short period can lower your score, especially if you don't have many credit accounts or you have a short credit history. Be especially careful when car shopping because Detweiler has heard lots of complaints from consumers whose scores dropped when they had several dealers pulling their reports for financing options. Rather than let a dealer shop your credit, choose a lender you like beforehand and get pre-approved for a loan.
People with excellent credit usually get the best credit card offers. But they’re smart about the cards they choose. For example, even though retailers often offer discounts on purchases when you sign up for their credit cards, these cards often have low credit limits, which can hurt your credit utilization ratio if you carry a balance on those cards.
Cards with annual fees also should be avoided, Steele says, unless they’re packed with benefits – such as cash-back rewards and miles that can be redeemed for travel – that outweigh the fee. Those who are smart with credit look for cards that waive that fee for the first year then re-evaluate the card in the second year to see if the benefits outweigh the fee, Steele says. It’s also smart to look for cards that offer a 0% interest rate for the first year, he says.
Both Detweiler and Steele say that to achieve and maintain a high credit score, it's important to get into the habit of monitoring your score and your credit report. Checking your report will help you figure out what's dragging down your score and identify any errors that need to be fixed. Monitoring your score can motivate you to improve it and can be rewarding as you watch your efforts pay off, Steele says.
You can order a free credit report yearly from each of the major credit-reporting agencies – Equifax, Experian and TransUnion – by visiting AnnualCreditReport.com. Credit-monitoring Web site Credit Karma offers consumers the ability to examine their TransUnion credit report free of charge any time they want and provides a free VantageScore and a TransUnion credit score. Quizzle lets you access your VantageScore 3.0 and Equifax credit report for free every six months. And you can get a free VantageScore 3.0 and a credit score from Experian through Credit.com. Or you could pay $19.95 per FICO score from each of the three bureaus at myFICO.com.
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