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1. Pay Your Bills on Time
Why it's important:
Your payment history makes up the majority, 35 percent, of your credit score. Even small oversights can significantly decrease your score. Late or missed payments stay on your credit report and can affect your credit score for up to 7 years.
How to increase your score:
Always make at least the minimum payment before or on the due date. You can set up payment reminders and automatic payments on your accounts to ensure you never miss a due date accidentally. Just make sure to keep enough money in your accounts to cover your bills. Review your credit reports at least once a year and verify that the information is correct.
2. Keep Your Balances Low
Why it's important:
The second most important factor in determining your credit score is the amount you use of your available credit. This is known as your credit utilization rate. If the rate is high, meaning you are close to your maximum credit limit, lenders are more likely to consider you a credit risk.
How to increase your score:
Having and using credit cards is not bad, but it's important to keep your debt under control. It's best to pay the full amount of your credit card bill every month. If you can't do that, pay as much as you can. Try to keep your credit utilization rate below 30 percent. This means if you have a credit card with a $10,000 limit, your balance should be below $3,000. Make sure to understand how credit limits work.
3. Don't Close Old Accounts
Why it's important:
Your score takes into account the length of your credit history, as well as how long you've had your different accounts. In general, a longer credit history means a higher score. If you close old credit card accounts, you are decreasing the average age of your accounts. The last time you used your cards is also taken into account. Even if you intend to keep an old account, your credit card issuer might close it if it hasn't been used in a long time.
How to increase your score:
Keep older credit cards active, even if you don't need them. Consider making small, recurring purchases with these cards, such as subscriptions to streaming services. Then, set up payment reminders or automatic payments to make sure you pay the balance on time. Also, think twice before opening new accounts, as they decrease the average age of your account.
Quick Tip:
When you close an old account, you decrease your total available credit. As a result, your credit utilization rate could increase, and your credit score could decrease.
4. Have a Variety of Loans
Why it's important:
Lenders like to see that you can handle multiple loans at once. In general, having a variety of credit cards and other types of loans, such as a mortgage, car loan, and student loans, that you pay on time is good.
How to increase your score:
This accounts for a relatively small part of your credit score, so opening new accounts just to try to increase your score may not be effective. However, look at the types of loans you have and consider improving the variety the next time you need to borrow money.
5. Think Before Applying for New Credit
Why it's important:
Getting a new credit card can both benefit and harm your credit score, so having a strategy is important. According to FICO, the leading credit score provider, studies show that people who open multiple credit accounts in a short period represent a higher credit risk than those who don't. When you apply for a new credit card, your credit score can initially decrease as your lender checks your credit report (known as a credit inquiry), and the average age of your account is lower.
How to increase your score:
Open new accounts sparingly and avoid doing so altogether if you're about to apply for a mortgage or another large loan. If you get a new credit card, try not to use it too much. That way, you use less of your available credit, which could improve your credit health. Additionally, if you have a limited credit history, a new credit card could help improve your score, as long as you pay it on time and don't accumulate too much debt.