It’s one of the ironies of modern financial life: if you want good credit, you have to use credit less often.
If you’re like most people, you can be proud of your credit score. Roughly 80 percent of Americans have FICO scores above the 620 sub-prime threshold, while 58 percent have scores of 700 or higher, according to data from Fair Isaac Corp., the company that pioneered credit scoring.
That’s because many of the “secrets” of great credit aren’t really so secret after all.
But some of the rules can be tricky. And others just don’t seem to make sense—until you look at them from the lender’s point of view. Good credit is just like anything else: learn the rules, and you can play to win.
Want to keep your credit nice and shiny? Here are the six basic rules you need to know:
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Don’t apply for credit unless you need it. Like buying that bag of cookies when you’re on a diet, if you apply for new credit you’ll be tempted to use it. Even more important, it can hurt your credit rating. Credit reports and credit scores help lenders predict whether you’ll pay back their money. Opening more accounts means that, at any given time, you have the potential to rack up more debt. And that makes you a riskier proposition.
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Know when to hold ’em and when to fold ’em. Kenny Rogers wasn’t singing about credit cards, but he might as well have been. If you’re planning to apply for a major loan (think mortgage or auto loans), that’s not the time to be opening or closing accounts. But that’s exactly what many people do, thinking that it will improve their credit.
“If someone tells you that closing accounts will improve your credit score, they don’t know what they’re talking about,” says Craig Watts, spokesman for Fair Isaac Corp. “It won’t improve your score, and it might damage it.”
That’s because if you spend the same amount but have less credit available to you, it looks like you’re a lot closer to your credit limits. And that makes lenders nervous.
- Even if you pay off the card every month, keep those balances in line. Credit scoring systems look at the percentage of available credit that you actually use every month on each card, whether you pay the balance or not, says Watts.
The higher that percentage, the worse the impact on your credit. A card debt that is “north of 50 percent is going to hurt your score,” Watts says. To maintain your sterling credit rating, know your individual card limits and stay well below them.
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Read the bill when it arrives and dispute any errors immediately. You’ll have more options and won’t be sending in what looks (to the lender) like a partial payment.
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Pay off balances monthly. Paying off your debts each month helps you financially in several ways. First, it saves you interest. Second, it reflects well on your credit. Most important, if you’re ever using more credit that you can pay off in one month, that’s a strong sign that you’ve left your financial comfort zone.
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Pay bills on time. Late payments indicate money problems, which flag you as a higher risk. That’s why they hurt your credit. And if you’re late with one card, another lender could see you as a potential problem and raise your rate.
The good news: with online bill pay, it’s even easier to make sure those payments post on time.
And if someone tells you they’ve never paid a bill late, chances are they’re telling the truth, according to Fair Isaac statistics. Says Watts, “More than half the population has never been late with a payment.”
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