While most consumers these days know that their credit scores play a pretty important role in their financial lives, one of the major problems you might face is that you often aren't quite aware exactly how they work, and thus may not know how to best maintain them.
Often, the trick to getting the best credit scores possible is figuring out what those who have been able to successfully manage all their accounts and finances are doing correctly to get to that point. Some of the things they do may be more or less common sense steps to take, and others might seem a little counterintuitive based on what you've heard about managing credit in the past. However, sticking to a few simple principles, as most people with excellent credit scores almost always do, will probably do a lot to help you fix credit mistakes you might have made in the past, and get your finances back on track as a result.
1. Make all your payments on time
This is one of those credit tips that seems very simple and straightforward, and that's because it is. In fact, this one issue is the single biggest factor that goes into making up your credit score, accounting for 35 percent of that rating. That means that if you miss just one deadline, in some cases by as little as a day (depending on your lender and the account type in question) you can see your score tumble by 100 points or more very quickly. In addition, missing a deadline will often result in a late payment fee, and maybe even penalty interest rates that make any balance you took on during that month cost you more down the road.
2. Keep your balances down
While this also seems like a no-brainer, it simultaneously runs counter to a bit of an urban legend about the size of the debts you owe. There is a somewhat common misconception out there that credit card lenders like to see you carrying large amounts of debt, because that means you'll have to pay it all back, usually with sizable interest charges. However, that's actually the opposite of the truth.
The way lenders look at your debts is as a simple percentage of the total credit limit you have across all your accounts at the same time, and this "credit utilization ratio" makes up 30 percent of your score. For instance, if you have four accounts with a combined credit limit of $12,000, and owe $6,000 across those cards, you're using 50 percent of your limits. That, as far as lenders are concerned, is way too high; usually you'll need to have your debts be less than 30 percent of your limits (in this scenario, that comes to $3,600). If you run the math for your personal and joint accounts, and find yourself well above that 30 percent limit, you'll need to start making larger contributions to your balances to reduce your debt to that more acceptable level.
3. Don't close or open new accounts after paying debt off
This is an extremely common mistake, and one that may have caused William Butler of Fairport Harbor, Ohio, to see his credit scores drop, according to the Cleveland Plain Dealer. Butler told the newspaper he has seen his ratings drop in each of the last three years, in part because he continually also opened more credit cards. Lenders tend to see repeated attempts to obtain credit in a short period of time to be a sign of financial difficulties, and thus your doing so will likewise serve to lower your score.
Butler also wondered whether he could improve his standing by closing the accounts he has, the report said. However, this is another of those perhaps counterintuitive facts: Closing your accounts can have a negative impact on your utilization ratio, which in turn can bring down your score considerably. For this reason, if you have any accounts with balances you've paid down to zero that you don't want to spend any more on, it might be wiser to simply cut up the card or file it away in a drawer somewhere, but leave the account open so that you can enjoy the credit-related benefits of all your hard and diligent financial work of the previous few months.
4. Keep close tabs on your credit reports
When you're trying to maintain good credit, you should also be taking the time to regularly order copies of your credit reports. By doing so, you will see exactly where you stand at the time, and also might be able to identify any potential unfair markings that could be marring your standing. If you discover any of these entries, it might be wise to contact a credit repair law firm, as this may help you get the problems sorted out quickly.