When it comes to your credit score, knowing the facts is important. After all, everyone wants to borrow responsibly, but not everyone knows how the FICO system works. Here are seven assumptions that can lower your score, and the facts that, in time, can raise your score.
1. The assumption: I pay my bills on time, my credit score is fine.
The facts: Paying your bills on time is important, and it accounts for the largest chunk of your FICO score. However, that “largest chunk” is still only 35% of your total score. It pays to know how your score is calculated to help you bump it up.
2. The assumption: Even though I only have two cards, I use them responsibly.
The facts: You should maintain at least three credit cards to maximize your score. There are great reasons for you as a consumer to have multiple cards, as well. If an establishment doesn’t accept a card type, you’ve got an alternative. If the bank decides to change terms to something you find unacceptable, you have options. Perhaps the best reason (and certainly our favorite) is that you can work with the cards that give the best rewards.
The mix of your accounts counts for 10% of your credit score. That means that it’s best to have credit cards and installment loans (such as a home or car loan, or student loan) on your report. There is a weak but present correlation in your mix of loans to your future risk, so take care to have your bases covered here.
3. The assumption: I never go over my limit, so my score should be high.
The facts: Maintaining a limit too near the maximum your card allows will hurt your score. That goes for the balances you carry month-to-month as well as what you charge within the billing cycle.
In fact, charging more than 30% of your available credit in any given month will lower your credit score. It’s tempting to charge everything you , from your water bill to that latte, to get more rewards points, but it will lower your score in the process.
This is another reason it’s a good idea to have more than one card. You can choose what card to use for a given purchase; groceries, bills, incidentals and keep all of your cards under the threshold.
4. The assumption: Credit is best used as an emergency fund, not something to use for everyday purchases
The facts: If you don’t use your accounts, credit card companies don’t report to credit bureaus. Since they’re not able to report that how you’re handling your account, your score doesn’t increase. This doesn’t hurt your score, but it doesn’t raise it, either.
If you leave an account dormant for too long, the company may decide to close it altogether. This reflects more poorly on your credit than a consumer closure.
A simple way to be sure you’re using all of the cards in your cache is to set up a revolving payment on them. Paying something as simple as your phone bill tells the company you’re still using your card and allows them to report that you’re handling your account within the agreed upon terms.
It’s always best to have a cash emergency fund, for many reasons. Cash is liquid and easily accessed when it’s needed. It doesn’t put you in a position to have to repay anything, especially if you’re now or newly out of work such as with a layoff or car accident. Cash also allows you negotiating power. That auto repair might cost you less if the shop doesn’t have to swipe your card. Finally, even in our Smartphone age, not everyone accepts credit cards. It’s best to be prepared for any eventuality!
5. The assumption: Opening store accounts wherever I go is a smart move.
The facts: Sure, that discount is enticing, especially when you’re considering big ticket items like furniture or televisions. The bad news is that going on a credit binge (that is, opening several accounts in a short period of time) decreases your score. In fact, 10% of your credit score is based on the number of hard inquiries reported, and those inquiries stay on your credit report for two years.
It’s hard to pass up the possibility of an immediate savings that feels substantial, and we all want to spend wisely, but consider this: since your credit score is decreased for a short time after each account is opened, you’ll be paying more interest. Every month you’ll end up paying that discount back in the form of higher payments.
The smartest move is to use one of your three major credit cards that is below 30% of its limit, and the one that gives you the best perks. Your score will thank you for it!
6. The assumption: Closing some of my cards will increase my score.
The facts: Closing cards will decrease your available credit, thus inflating the percentage of credit you’re using. If you have $10,000 available across four cards and you’re using $2500, you’re at a comfortable place. Close three of them, and you’re maxed out!
Age of accounts is important to your credit history and accounts for 15% of your total score. Both the age of your oldest account and the average age of your accounts factor in.
7. The assumption: That library fine and parking ticket I forgot to pay will never make it to my credit report.
The facts: More companies are starting to report these small delinquencies, and negative information greatly impacts your score. You don’t want a book returned late or the meter you forgot to feed to haunt you for years to come!
When it comes to your credit score, don’t let your assumptions ruin a potentially great number. Treat your credit like you would any good relationship; keep your old friends around, don’t overlook safe boundaries, and remember the little things. Your score should thrive!
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