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Maintaining a good credit score is more critical than ever. A good credit score enables you to obtain additional credit for important life purchases, such as a car or a home. You can often score better insurance rates with a high credit score, and forego deposits on your utilities the next time you move into a new residence. Your credit score can even affect your job prospects.
However, despite its importance, a staggering number of Americans have poor credit. Approximately one-third of Americans have a credit score below 601, which falls between fair and poor credit. It doesn't have to be that way, though. Here are five tips you can use right now to improve your credit score, and keep it that way.
1. Understand what goes into your credit score
Before you maintain or repair your credit score, you need to understand it. Your FICO credit score is a number ranging from 300 (the "bad" end) to 850 (the "good" end). The score derives from an analysis of five information categories on your credit report: payment history, credit utilization, credit history, new credit established or requested, and credit mix.
While all these factors play a part in determining your credit score, they're not all equally important. Your payment history, for example, comprises about 35% of your score. You credit utilization counts for 30% of the score, so it's quite important as well. The other three factors each comprise only 10-15% of your credit score. Understanding how much each of these factors impacts your overall credit score will help you focus your efforts and make it easier for you to maintain or improve your overall score.
2. Pay your bills on time
As detailed above, payment history counts for more than a third of your credit score. How well or poorly you pay your bills is often the difference between good credit and bad. Any of your payees, from credit card companies to your Internet service provider, can report late payments to a credit bureau and affect your overall credit score. The takeaway is obviously to pay your bills on time.
3. Manage your debts
Credit utilization is another major factor in your overall credit score; the higher your outstanding debt is, the lower your score. As a rule, you shouldn't utilize any more than 30% of your credit limit on any card. For example, on a card with a credit limit of $1,000, you should never have more than a $300 balance during any billing period.
If you have several maxed out credit cards, your score is likely suffering because of it. It can be a long, difficult process to pay down your balances on them all, too. If you need to address high levels of outstanding debt in an effort to improve your credit score, you may want to consider a debt consolidation loan. Debt consolidation can help you manage your payments, often at a lower interest rate, and help ensure that you're paying back the debt that's holding your credit score down.
4. Keep those credit cards open
Even if you consolidate all your credit card debts into a single loan, make sure you don't close out your old credit card accounts. Time is a significant factor in your credit history, and if you close out an older credit account that you don't use, it will shorten your credit history, likely lowering your score. Go ahead and cut up the cards, but leave the account open.
5. Monitor your credit report, and fix errors
You're entitled to one free credit report every 12 months from each of the three major credit-reporting companies. Make sure you download these reports in intervals and use them to monitor your efforts to maintain or improve your credit score. You'll be able to determine where your hard work is paying off, and the areas you need to focus harder on to improve your score.
Monitoring your credit report will also enable you to spot errors that may be erroneously dragging your credit score down, too. If you spot an error on your report, you can fix it. You can send a letter to the credit bureau in question, detailing all the errors in the report that you're disputing. The credit bureau should respond to you within 30 days.
You should also contact the creditor in question, informing it that you're disputing the report, and provide a copy of the information as well. Addressing errors on your credit report is a straightforward, cost-free way to improve your credit score in a short period.
Improving your credit and maintaining a good credit score can be challenging, but it's definitely worth the effort. Improving your credit score even just from bad to fair can be the difference between having to extend your apartment lease for another year and being able to secure a mortgage for your own home. Follow these five tips and get your credit on the right track today!