Whether you have actively thought about it or not, you have built a credit history and a credit score that is reviewed constantly by lenders, credit card companies, financial institutions and even employers. Your credit score not only affects the rate you will be charged for credit, but also affects the financial products and services you will be able to obtain. A poor credit score can mean that you may be turned down for even a basic account such as checking.
- Make payments on time: This is one of the most important actions you can take. Take advantage of phone or electronic bill payment capabilities. If you don’t like the idea of automatic payments, you can still schedule payments in advance using First Reliance Bank’s free BillPay service. That way, you can control the amount and date of each payment.
- Don’t “max out” your credit cards: Overall, keep your balances on credit cards low. Try not to use more than 50% of your credit card limit. For example, if your credit limit is $2,000, don’t charge more than $1,000 before making a payment. Using even less is better. Lenders want to see that you can effectively manage credit and that you don’t constantly “max out” your limit.
- Don’t jump from one credit card to another: Among other factors, lenders consider how long you maintain your lines of credit. Opening new cards can lower the average age of your accounts, which can lower your credit score. Carry a few cards that provide the benefits you seek. Only take a new card if it offers a truly unique benefit that works for you.
- Don’t create a lot of new debt at one time: For example, don’t open several new credit cards in a month.
- Don’t open a credit card at a retailer just to get a discount on a one-time purchase: These cards can negatively affect your credit score by adding to the number of times you have applied for credit, lowering the average age of your accounts, and adding another line of credit to your credit report. A lower credit score can cost you a lot more than the few dollars you will save at that moment!
What Makes Up a Credit Score?Credit scores are calculated using a mathematical formula that evaluates the information in consumers’ credit reports. The formula statistically compares your information to the past patterns of millions of other consumer credit files. Your score is a number that reflects your credit risk to lenders. A higher number or score indicates lower risk; a lower number or score indicates a higher risk. When you apply for credit, lenders (including those “apply here” retail card offers) use credit scores to quickly summarize your credit history, and to help them determine how likely you are to repay on time and according to terms. Your score is based on information in your credit report, including:
- Your payment history
- How much money you currently owe
- How long your accounts have been open
- What type of credit you use
- How much credit you used compared to the amount of credit you have available
- How often and how recently you’ve applied for credit
Sources: First Reliance Bank staff. Federal Trade Commission Bureau of Consumer Protection, http://www.ftc.gov “Improving Your Credit Score” June 2010
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