By Donny Gamble
Achieving a good credit score is often considered the hardest part of the credit process, however, once you reach a solid number, many people struggle to maintain their momentum.
To keep your credit score high, you need to be aware of how the credit score system works, and how your active spending influences the data.
Today we will explain the main factors which affect your credit score, methods to maintain your credit score, and tips to help you move from good to excellent.
Each of our suggestions can take a while to master, so remember that good financial security isn’t a race. Take your time, and be consistent.5 Factors That Affect Your CreditHow Lenders Use Your Credit ScoreWhat is a Good Credit Score?How to Maintain A Good Credit Score
7 Benefits of Having A Good Credit ScoreTips to Help Increase Your Credit ScoreMonitoring Your Credit ReportCredit Score FAQ’s
There are 5 main factors that affect your credit score. They are your payment history, the amount you owe, the length of your credit history, your new credit lines, and the mixture of credit lines.
This may sound like jargon, but we will explain what these terms mean.
Your payment history is often the biggest factor in determining your credit score. This category refers to your positive and negative payment history.
If you always pay your repayments on time, then your payment history will be positive. If you have fallen behind and were charged late payment fees, then this negative history will be remembered.
If you have filed for bankruptcy or collections, your payment history will show this record. After 6 years, your payment history expunges your record, meaning black marks against your name may be removed.
However, it can take 10 years for a bankruptcy notifier to be removed.
The second-largest factor is the amount you currently owe. If you are using all of your credit or going over your credit, then lenders will assume you are a risk.
This risk will lower your credit score. Most lenders will use a credit utilization rate to consider how much of a risk you are. They tend to want a rate of 30% or less.
They calculate the rate by adding up all of your credit lines (credit cards, loans, etc), and dividing them by the total credit limit currently offered to you (credit card max, overdraft max, etc).
They then multiply this number by 100 to create a percentage. You can figure out your own credit utilization rate using this method and see if you are under 30%.
The longer your credit history is, the more weight your claim of financial stability is. If you have never made a late payment in 20 years, your history shows you are capable of paying your monthly bills.
Whereas someone who has a 2-year long credit history still shows a possibility of risk. This is one reason why maintaining an old credit card is important to keep your score high.
Every time you apply for a new credit line (like a credit card or a loan), your credit score drops. This is because you are showing the need for more financial support.
People who apply for credit cards often receive a 0% ARP. Those in large debts often switch to these low APR rates so they can pay back their debt without interest.
Although this is a great way to reduce your debt, the credit score system recognizes that this is a sign of financial pressure.
Before you apply for a new credit card, ask yourself if the inevitable drop in your credit score is worth it.
If you can show that you can successfully handle different types of credit lines (such as a mortgage, auto loan, student loan, credit card, store card, etc), then you are showing your ability to handle different financial responsibilities.
This concept is often the least important in the credit score process but is still a factor nonetheless.
Lenders will use the score and the information above to consider how likely you are to pay back their credit. Although there are multiple different scoring systems, they all use this information but prioritizing different aspects of your credit history.
Each lender will use their own version of the calculation process, to show them how stable your financial situation is in comparison to their idea of importance.
Because each credit reference agency (the companies which score your credit) has a different method, there isn’t one number that indicates a good credit score.
Generally speaking, most agencies will rate you between 300 and 850. In this system, less than 580 is considered bad. 580 to 669 is often considered fair, meaning you aren’t in a great financial situation but you can keep on top of your finances.
670 to 739 often means you are doing well, but there is still a risk. 740 to 799 generally means you are doing very well but have the occasional negative impact (like applying for more credit).
Lastly, 800 and above is considered excellent. To be excellent you need to be stable financially, be living within your means, have a long history of good financial management, and aren’t considered a real risk.
To maintain your credit score, you need to consider the factors above and keep showing lenders that you are not a risk. However, it is one thing to know that your credit utilization rate should be below 30%, but it’s another to understand how that works in your daily life.
To help you, we have created some tips and thinking points to help you maintain your good credit score.
Although a 30% or less credit utilization rate is the goal, it will be easier to manage your rate if you keep your credit card debts as low as possible.
This simplified method will help you remember that as long as your credit card balance is low then your rate should be low too. Getting as close to $0 as possible will allow you to keep a high credit score.
Ideally, your credit card should be paid off every month. You could do this by paying off little bits every week and then clearing the debt at the end of the month, or you can ensure your credit only gets used to pay for things that you can afford to pay back instantly.
Because your payment history is the biggest factor in most credit scores, you need to pay your bills on top to maintain your good rating.
To make this task easier, we recommend automating your bills. Set your payment date for the second of each month (or the day after you get paid).
This way your bills will be taken out of your account before you have a chance to spend the money. As the payment will be automatic, you don’t have to worry about manually sending each company your money either – reducing your stress.
Some people find it easier to set up a bank account solely to pay their bills. They send the correct amount to this additional account, knowing they cannot accidentally spend the money.
The companies then take money from that account automatically on whichever date you can set up for them.
The longer we stay with a credit account, the more likely the APR will grow. New credit cards offer the best APR deals, but after a couple of years, the rates increase.
A lot of people close down their accounts when this change happens and search for a new account to get the best APR deals again.
Although this might seem like a smart move, when you close down an account you are closing the good payment history you have gathered.
We mentioned before that the length of your payment history is a key factor in your credit score. If you close down an account, that 20-year history which makes you look low-risk is closed down too – the data goes with it.
As long as keeping the account doesn’t harm your spending ability, you should keep your old accounts open to show off your payment history.
Following the same train of thought as our last point, you shouldn’t open a new account simply for the APR rate. Yes, you might want a lower interest rate, but ideally, you should be paying off your credit card debt at the end of the month. If you do this, you will not be charged.
This means it doesn’t matter what the interest rates are, if you are keeping your money under control, then you don’t need to look for the best rates.
As we said before, opening new credit lines suggests you need more financial support. It doesn’t matter if you are closing some down at the same time, as the rating system doesn’t take that into account.
You have to consider what is more important to you, maintaining a good credit score or having lower interest rates.
It can be easy to miss key information, especially when your life doesn’t revolve around your financial situation. If someone hacks your account, it can be a while before you realize the gravity of your situation.
Checking on your credit report regularly can help you spot unusual activity and question the situation before things take a turn for the worse.
You can then call up the company which has shown the fraudulent activity and explain the situation, saving your finances and your credit score at the same time.
For some people the bills aren’t the problem, it’s the small transactions that quickly start taking over their credit cards. Small transactions are just as significant as big ones, as they can seem like a non-issue that is easy to forget, but in reality, they take up your whole credit card bill.
Monitoring your own spending will allow you to see how much money you actually have left to spend, and can stop you from accidentally buying more than you can pay back.
We suggest figuring out how much money you half left after bills and then dividing that amount by how many weeks you have left until your next payday.
This amount becomes your weekly allowance. Count every dime you spend, and when a new week begins, you will have a new allowance to start over with.
Having small goals can help you manage your money and track your spending without too much pressure.
As a general rule of thumb, you should never spend more than your credit limit. Although your lender may allow the transactions to go through, you will be charged for going over your maximum limit, and you will be telling your lender that you cannot follow their lending agreement.
This will show in your credit report, telling other lending companies that you cannot handle your finances.
We used to say that everyone should have 3 months’ worth of their pay in their emergency fund. That way if they unexpectedly lose their job, they have 3 months to find a new one.
However, since the COVID-19 pandemic, we now know that 3 months isn’t long enough. The new goal is to have enough pay to sustain you for 6 months or more.
Not only does this show lenders that you have the financial security to pay them back, but it also protects you should you lose your job.
Although you need to pay the minimum amount asked for by your lender before their due date, there is a better way to show you are good with money.
Paying little and often means that when the request comes, you’ll have already paid off their minimum requirement and then some.
Using the weekly allowance we discussed before, you could use any money not spent in the week to pay off your credit card.
Seeing as you will receive a new allowance in a few days’ time, paying off your credit card should not affect your plans in the weeks to come, but it will make reducing your debt easier.
Reading about the work you need to put in, might make you wonder if a good credit score is even worth it. To anyone kicking their feet and ready to give up, we want to show you how life can be easier and cheaper if you manage your credit score property.
When insurance companies consider your request, they look at your credit history. If they see that you struggle to pay your bills on time, they might charge you extra.
This is because you are seen as a financial risk, and so more money is needed to make sure that they have enough to cover your claims.
If your credit history and credit score show that you can pay your premiums on time, they will see you as a reliable customer. They will invest in your long-term membership with them, by lowering your charges.
Basically, if you can prove you can pay them on time, they won’t have to worry about receiving enough money, so they can afford to charge you less.
Some loans (like a mortgage) require a deposit before a lender will agree to the terms. The upfront payment ensures the lender still has some of their money, if you cannot keep up with the loan.
However, sometimes finding enough money to put down a deposit is too difficult. This in turn stops people from getting the mortgages or loans they need.
If you have a good credit score, you are showing the lender that you can keep up with your payments. This adds a level of stability to your application, suggesting that you are not at risk of financial instability.
Because of this, the lender may choose to offer a lower deposit request.
Just like insurance companies, utility companies consider your credit score when they offer you a fixed rate. A good credit score shows the company that you can pay them monthly, on time, and without issue.
Because you are less risky, they can charge you a lower amount knowing they don’t have to consider banking money for a possible future late payment incident.
Some cell phone companies require a deposit before agreeing to a phone contract. However, if you have a good credit score, you can avoid this large down payment and get a contract that doesn’t involve pre-paying.
Interest rates on your credit cards are created using your credit score. Depending on what your score is, you may be entitled to a lower APR (annual percentage rate).
Just like with mortgages, and phone contracts, the lender is less worried that you won’t pay the money back and so doesn’t need to charge you as much.
As you are less likely to fall into a bad financial situation, the lender needs to create less of a safety blanket through the interest charges.
Because you have proved yourself capable of managing your finances, you are more likely to be approved for higher credit limits.
The better your credit score is, the easier it will be to apply for big loans, credit cards, and mortgages.
Because you will be approved for higher credit limits and don’t need to pay as much in your deposit, your good credit score can help open your world to more housing options.
Although your income hasn’t changed, you have proven to the lenders that you can handle your current financial situation. With less money to pay upfront, larger loans to apply for, and lower interest rates, it all adds up to a larger home for you to purchase.
If your credit score is good, but you want it to be excellent, or perhaps you are just a couple of numbers behind the green banner, then we have some tips to push you into the next credit score bracket.
The best way to increase your credit score is to be on top of your financial situation. This means knowing your monthly income, knowing when your bills are due, and tracking your spending habits.
You may need to cancel some subscriptions to keep yourself inside your spending limit, but if you can get to the point where you are saving every month instead of adding to your debts, then you are on the right track.
To go one step further, you can try and pay back your credit card debts strategically. The best method is to pay back every credit card’s minimum payment, but pay more to the least expensive account.
Once the least expensive account has been completely paid off, don’t add that monthly cost to your free-spending or savings account; instead, use it to pay off your larger debts.
This will create a snowball effect, allowing you to reduce your debts faster and faster with every credit account reduced to $0.
A credit-builder loan is a small loan. The idea is to apply for the loan and to add a new credit line to your credit history. As we said before, one of the best ways to improve your credit score is to prove you can handle different types of financial borrowings, or “credit mix”.
Applying for a small loan, which you pay off in a couple of months, will add “loan” to the list of credit lines you can safely manage.
Which in turn, will make your credit history look even stronger.
If you haven’t got a credit card already, we suggest that you get one. Although they may seem daunting, there is a simple way to use them without getting yourself into financial hardship.
Just as we discussed a weekly allowance earlier, you could use your credit card instead of your debit card to pay for your allowed spending.
Then when the week comes to a close, you can pay off the credit card using your debit card.
If you need a quick boost to your credit score, then we suggest talking to a trusted friend or family member about becoming an authorized user.
Authorized users are people who have permission to use another person’s account but aren’t legally responsible for paying for the bill. This privilege is often given to children, spouses, and family members.
The original account holder has to agree to your authorization, and you can be removed at any time. If you are connected to someone’s account like this, you can benefit from their high credit score, as their credit line connects to yours.
You can buy authorized user credit lines online, but because of the intimate connection you will have with the other person’s financial details, we suggest asking a friend or family member first.
If you use the person’s credit card, or if they start to decline financially, then you will both see a dip in your credit score. If the authorized user doesn’t pay their bills and starts developing late payment fees, then the original card holder’s credit score will suffer.
Although this type of connection can be very helpful in increasing your credit score, both you and the original account holder have to think seriously about the commitment you are making before signing any contracts.
Despite rent being one of the biggest expenses in most people’s monthly budget, it isn’t rated highly on your credit score.
To make that big payment mean something to your credit history, you should pay the bill using a credit card and then pay the card back using your debit card.
The large payment to your credit card will show you using the credit line and being able to pay back a large sum of money with ease.
Make rent work for you.
If you don’t pay for rent, then we suggest following the same logic with utility bills. Utility bills are counted in your credit score, which is why we wouldn’t suggest it normally, however they are another large payment you need to make.
Paying through your credit card, just like with rent, will show how you can pay back large sums of money with ease. Again remember that you should pay your credit card back almost immediately.
We suggest creating an automatic payment to the bill from the credit card, and another to the credit card from the debit card; always allowing for a couple of days’ wiggle room in case the banks take their time to make the payments.
To maintain your good credit score, you need to know how credit scores are calculated. When you are aware of the 5 factors (payment history, amount owed, length of credit history, new credit lines, and credit mixes) you can use that knowledge to understand how your finances will be read.
If you monitor these credit details, you can manipulate your credit score into reflecting your best financial habits. Paying your bills on time, keeping your old credit cards, and keeping your credit balances as low as possible are all reachable goals to keep your credit score high.
Keeping an eye on your credit lines and credit report will help you notice when elements are slipping.