Many people do not have the credit score they need to get the loan or line of credit they need, or to get it at the low interest rate they would like. Credit bureaus estimate that as many as one out of every five Americans have subprime, or very poor credit. FICO scores credit histories on a scale of 300 to 850. Anything below 620 is considered bad credit, while over 800 is excellent.
If your credit score is not as high as it could be, the first step to boosting it is to understand what goes into a credit score. There are five factors that FICO uses to evaluate credit: payment history, amount owed, length of credit history, how much new credit you apply for, and how many different types of credit you use.
Out of these five things, payment history makes the biggest impact on your credit score. With 35% of your score coming from whether you make payments on time, the most important thing you can do to improve your credit is to always make payments on time. Never miss a due date, and always pay at least the minimum amount due.
The second biggest factor is how much you owe; this accounts for 30% of your score. Try to keep your total balance at less than 30% of your total credit limit, across all your cards. That means if your credit limit is $10,000, you should not have a revolving balance higher than $3,000.
At 15% relevance, the length of your credit history is the next most heavily weighted factor. To keep your history as long as possible, never close old accounts, even if you do not intend to use them any longer. Keeping accounts open is good practice to achieve the highest credit score. Make sure the accounts stay active by using them every few months. Just charge a small amount and pay it off right away so the account stays open.
The last two factors – types of credit used and new credit – each count for 10% of your score. They are the least important components, so don’t worry too much about them, but if you can, try to take out more than one type of loan or line of credit, and don’t go crazy applying for new credit cards.
If you follow the above guidelines, your credit score should start to improve. Remember, no matter how bad your credit is, you can improve it with time, patience, and careful use of credit.
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