Everyone wants to have a good credit score, right? Well, it’s important you know how to make that happen. This is another topic with a lot of misinformation surrounding it, but I’m here to provide you with the truth about how to manage your credit correctly.
Let me start by providing a quick recap on the five factors that go into determining your credit score:
- Payment History
- Utilization or Amounts Owed
- Length of Credit History
- Types of Credit
- Credit Inquiries
So, what can you do to manage each of these factors and maintain a good credit score?
Okay, this probably goes without saying but, you need to make your payments on time to maintain a good credit score. However, one thing you may not know is that you have up to 30 calendar days to make a payment before you receive a late payment penalty on your report. If you’re one of those people who pays everything with cash, that’s going to have a negative effect on your payment history because there will be nothing to track and report back to FICO.
Utilization or Amounts Owed
We’ve talked before about the importance of using credit cards. You have to have credit cards in order to have a good credit score, plain and simple. But, when it comes to those credit cards, you need to maintain the 30-50 rule. What that means is that you need to make sure you are only utilizing between 30-50% of your credit limit. Again, utilization is determined by looking at your balances in relation to your limits on all of your open revolving accounts. One thing I always tell my clients is that if you’re seeking financing, it’s a good idea to keep your balances below 30%. If you’re not seeking financing, it’s okay to stretch your balance up to 50% of the limit. But, remember that once you go above that 50%, your credit will take a hit.
I’ve had people ask me why it’s okay to go up to 50%, and it’s simply because it shows that you can manage high balances and pay them down. One other thing to remember here is that you should request a limit increase every six months on your revolving accounts. This is another way of showing that you can manage a high balance.
Length of Credit History
The earlier you start building your credit, the more your credit score will benefit. These days, you can start building credit early, even at the age of 13! The longer you maintain these accounts, the more benefit you will see as well. It’s natural for some accounts to fall off your report when you pay them off, such as an auto loan or a student loan, so the best way to maintain this benefit is through credit cards.
Types of Credit
I’ve mentioned before that your credit score will benefit when you have a variety of accounts on your report, whether it’s a couple of credit cards, an auto loan, a home loan, etc. When it comes to your credit score, it’s important that you remember that it’s just a math equation. So, it doesn’t matter if the credit is positive or negative. For example, suppose the oldest account on your report is a negative hit from 10 years ago, and you get rid of it. In that case, it’s likely going to cause your score to decrease because you’re basically reducing your length of credit history.
Remember what I’ve said before: Banks only lend money to people who don’t look like they need money. So, if you have consistent inquiries on your report, you’re going to look desperate, and that’s going to come into play when a lender is determining your risk. What you do need to know is that you should have no more than six inquiries per credit bureau within a six-month period. So, you can make one inquiry at each bureau per month before you see a negative hit on your credit.
Managing your credit is important, and that’s why I want to help you understand the factors and the steps you can take to maintain a good credit score. You can learn more in my book, 3 Paths of Lending, where I talk all about credit and acquiring funding for your business.
You can also visit my Youtube channel where I discuss this topic and more. Just click here to watch the video.
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