Your credit score is an indicator of your financial power. It’s used by lenders and creditors of all kinds to determine your creditworthiness, likelihood to repay debts, and overall money management skills. Having a strong score is especially advantageous during times of economic uncertainty, when you may need fast access to capital to cover unforeseen expenses or supplement cash flow if revenue generation is down. No matter what your current credit score is, you have the ability to maintain or strengthen it with just a few simple steps:
- Make your payments on time–every time
Your “payment history,” or record of on-time payments, makes up the largest portion of your credit score calculation, counting for 35% of the total. It’s for this reason that you should always strive to make your monthly payments, putting as much as you can towards your outstanding balance. Making your payments demonstrates to creditors and financial institutions that you’re a creditworthy, responsible borrower.
Tip: Set your bills up for autopay, that way you never have to worry about missing a payment.
- Be mindful of your credit usage
The second most important factor when calculating your credit score is “credit utilization,” or how much of your available revolving credit you’ve used. This counts for 30% of your total score. Remember that number, because 30% utilization is also the threshold that credit agencies recommend you stay under in order to keep your credit score in top shape. That means that your outstanding balance across all your credit cards, merchant cards, and lines of credit is less than 30% of the credit available to you.
Tip: Create and follow a budget that allocates as much as you can to your outstanding balances, so that you can work aggressively towards getting your credit utilization ratio under 30%.
- Hang on to old credit cards
Though it may be tempting to close credit cards you’ve paid off or haven’t used in years, your credit score will benefit by keeping them open. In addition to contributing to your overall available credit, 15% of your credit score is calculated by the average age of accounts, often called “age of credit.” This is calculated by taking the average age of all your open credit accounts. The longer your average age of accounts, the better for your score, although about 7 years is considered reasonable to establish a good history. So those old credit cards in your wallet? Hang on to them.
Tip: Consider making and immediately paying off a small purchase on any credit card you haven’t used in a while. This will indicate to your creditor that the card is still active and decrease the chances that they’ll cancel it due to lack of use.
- Keep an eye on your score
Because your credit score can change every month, it’s important that you monitor it regularly. One of the biggest mistakes you can make when it comes to credit is assuming it’s a “set and forget” system. Keeping track of month-to-month changes to your score can help you identify areas that you may need to work on, alert you to fraudulent activity (like unauthorized accounts opened without your knowledge), and show you if any of your creditors made errors in reporting your payments.
Tip: Sign up for a credit monitoring service–there are many free, reputable ones available–that will alert you to changes in your score and keep you on track towards strengthening your credit.
- Diversify Your Debt Portfolio
10% of your credit score is calculated by the types of credit you have. Credit agencies want to know that you can manage different kinds of debt, including credit cards, mortgages, personal or business loans, etc. Diversifying your credit types helps to demonstrate that you have this ability and may improve your credit score.
Tip: If your only debt is credit card debt, consider taking out a loan to pay those balances down and create diversity in your debt portfolio.
While following all of these tips can result in a boost to your credit score, making a larger impact often requires more significant action, like taking out a debt consolidation loan. To learn more about how a loan like this can improve your credit score, and give you the financial support you need, speak with one of BHG’s financing specialists today by calling 866.297.4664.