Clearly, with a good credit score, life is easier because you can get a loan faster, pay less interest, and save money on insurance and security deposits. Understanding how the scoring system works and playing by those rules will help you maintain a good score.
What is a good credit score?
A credit score is typically a three-digit number ranging from 300 to 850. Credit scores are calculated using information from your credit reports, such as your payment history, the debt amount, and credit history length.
Although ranges differ depending on the credit scoring model, credit scores ranging from 580 to 669 are generally considered fair. 670 to 739 are considered good, 740 to 799 are considered very good, and 800 and above are considered excellent.
With the average FICO credit score in the United States reaching a new high of 703 in 2021, many Americans are now reaping the benefits of good credit.
How to maintain a good credit score?
You can get a good credit score if you keep your finances under control, and if you try hard enough, you can reach the excellent three-digit number, but how do you keep it that way in this life that is so unpredictable? Here are a few approaches:
Pay your bills on time
On-time payments are essential for your bills, as your payment history accounts for 35% of your FICO score calculation. Pay every financial commitment on time, to keep your score high. If you’re worried about missing a payment deadline, automatic bill payment features can help you stay on top of your account payments.
Keep your credit balances low for a good credit score
Your credit utilization rate, which compares the current balance and credit limit of revolving accounts such as credit cards, is an important scoring factor. The higher your credit card balance in comparison to your limit, the lower your score. To maintain a good score, keep your combined credit card balances within 30% of your combined credit limits.
Maintain credit history with older credit cards
You may want to keep the account open even if you no longer use your first credit card. Be sure to dust off the card once in a while, and maybe tie it up with your Netflix account in order to keep it active.
If you close a credit card, the issuer no longer sends updates to the credit bureau. This lowers your score because the credit scoring formula gives less weight to inactive accounts. After about ten years, the credit bureau will remove the history of that closed account from your report entirely, which will reduce your average credit age and lower your score.
Only apply for credit that you need
Multiple credit applications in a short period may have a negative impact on your score. Make certain that you only apply for credit when it is truly necessary. Applying for multiple credit cards in a short time can make you appear risky to lenders, but for a car or personal loan, they are considered a single inquiry.
Keep a tab on your credit report
Check your credit report for errors on a regular basis. You might be doing everything correctly, but others might not. And mistakes can harm your credit score.
Have an emergency fund
This is for your ‘unpredictable life’ credit. Try keeping three to six months’ worth of living expenses in a liquid, interest-bearing account. As a result, if you incur a sudden expense, you won’t be forced to borrow more than you can repay. Setting up recurring transfers into a savings account is one way to simplify saving for your emergency fund.
