Credit score is a number used in lending and credit transactions to measure an individual’s creditworthiness. It is a three-digit number calculated from information in the credit report. Credit scores are the key factor lenders consider when extending loans, whether for mortgage, auto loan, or any other type of credit. As such, your score affects how much interest you will pay on loans as well as the maximum amount you can borrow.
How to maintain a good credit score
1. Pay your bills on time
This is the number one rule of credit-it makes up nearly 35% of a person’s FICO score. Make sure you pay your bills, on time, every time.
2. Limit use of available credit
Lenders want to see that you can manage your accounts responsibly and avoid overspending or taking on debt beyond your means to afford. Having many open lines of credit is risky; use only what you need, and keep the rest closed unless you are borrowing money for a big purchase (like a car). This makes up 30% of your score.
3. Keep your debt amounts low
Your credit utilization rate-the percentage of how much debt you carry on each card-makes up nearly 30% of your score. The lower your debt, the better. Make sure you pay off those balances, especially if you have a high credit limit on a particular card.
4. Mix up your credit use
It’s hard for credit scoring models to assign risk if you use only one type of loan regularly (for example, always using just a credit card). Make sure you have loans from different types and from different lenders; this makes up 10% of your score.
5. Don’t open new accounts
Some lenders consider one new account to be a sign of financial weakness or trouble. Open no more than one or two new accounts a quarter and make sure none of them are secured by a mortgage, for example. This also affects 10% of your score.
6. Pay off high-interest debt as soon as you can
This makes up nearly 10%, so pay off credit cards with the highest interest rates first. Also, even if you don’t have to pay interest on the card, make sure you pay it in full each month and on time-making this up to 7% of your score.
