Not only did crediting accounts reduce my credit score – and it cost me thousands of dollars when I got a mortgage years later – but it also made it harder for me to get credit when I got home. The experience was a costly lesson: paying credit cards is generally good, but closing accounts is often not. That is why it is important to know which debt repayment strategies can improve your credit score. By paying off credit card debt and managing how and when you get credit cards in the first place, you can lower your debt and at the same time increase your credit score.
How your credit score is calculated
Your credit score is influenced by four important factors:
- Your payment history in the past . This accounts for 35% of your credit score. If you have paid late, skipped payments or did not pay your debt at all, this will be displayed in your credit report and your credit score will be lowered. Timely payments improve your credit score. That’s why good accounts should never be closed because that credit history will eventually disappear from your report.
- The amount of money you have . This is known as “use of creditworthiness” and it affects 30% of your credit score. Credit utilization only means the ratio of your available credit to the amount that you actually owe. Someone with $ 10,000 in available credit on different lines of credit who owes $ 2,000 has a credit use of 20% (2,000 divided by 10,000).
- How long have you had credit? The longer you have accounts with a good reputation, the better your credit score will be. This makes up 15% of your credit score.
- The amount of new credits and types of credit accounts that you have . This accounts for 20% of your credit score and includes both how often you have applied for credit and which credit accounts you have secured. If you apply for 10 credit cards in one year, you will be seen as a higher risk than someone who applies for one card per year. This is because it seems like you are trying to get a huge amount of credit in one go, and therefore your creditworthiness suffers. Moreover, the credit institutions believe that a person with different types of credit – such as a car loan, a credit card, a student loan and a mortgage – may be a borrower with a lower risk than someone with only high interest credit cards or a stack of department store cards.
Tips to improve your credit score
1. Understand credit usage
It may seem counterintuitive, but in many cases having more credit cards can help you qualify for a new card. Because of the use of your credit, your credit score is often higher if you have more credit accounts. This is one of the least discussed but most important features of your Credit score. Since 30% of your credit score is based on how much money you owe to your debts, the amount of credit you have available relative to the credit amount you used is a crucial part of the credit score puzzle.
For example, someone who has $ 50,000 in available credit but only has $ 1,000 in outstanding debts has a credit utilization ratio of 2%. The lower this ratio, the better the credit score.
As this affects 30% of a person’s total credit score, paying off debts and keeping the accounts open increases your credit utilization ratio, improving your credit score and qualifying you for more credit at a lower interest rate.
2. Start Young
Ironically, many cost-conscious and debt-dependent people shoot themselves in the foot by avoiding credit cards., Getting credit cards in college can result in lower mortgage rates and car loan payments in the future, and save tens or possibly hundreds or thousands of dollars over a lifetime . For those who have the self-control not to spoil too much , getting credit cards at the university can result in lower mortgage rates and auto loans in the future, and save tens or possibly hundreds of thousands of dollars during a people trial.
It is important to establish creditworthiness and build a history at a young age for two reasons. First, if you get a credit card and pay your debits, you build that old payment history, which forms the bulk of your credit score. You don’t have to buy a Visa card or Mastercard, because department store cards, secured credit cards and gas cards all appear on a credit report. Since payment history has the greatest effect on credit scores, you build up your debts on time and you build that solid payment history and you further increase your credit score. And paying more than the minimum – or even better, your entire balance every month – prevents you from building up debts that you cannot pay.
Secondly, if you receive a credit card early and pay on time, you have a longer credit history and that results in another 15% of your credit score. In other words, starting at a young age can affect half of your credit score – but it requires discipline and responsibility not to spend too much, to make late payments or simply to pay the absolute minimum. These are real dangers of getting a credit card and should be avoided. These errors can haunt you and your credit score for years.
3. Collect and use cards
So you are 18, you have your first credit card and you are ready to achieve an 800 Credit score. Great – but just getting the tickets is not enough. You really have to use them to build a history that will benefit you in the long run.
Since the amount charged is not as important as the frequency of payments, the best strategy is to spend a little money with a card and pay it monthly. Even charging and paying $ 20 a month on a credit card is enough to build a kind of past payment history that will increase your credit score.
But when you use your cards, you must use them wisely. For example, just sending your minimum monthly payment to a credit card keeps your credit usage ratio high and lowers your credit score – while getting further and further into debt. Psychologically it is much easier to spend money with plastic than with cash, and it is tempting to only pay the minimum. Again, discipline and responsibility are key, and if you think you don’t have the discipline to use your cards responsibly, then you should wait until you do.
4. Pay off accounts instead of closing them
Here I did it wrong: when you are ready to pay off a debt, you can pay it and close the bill or pay and leave it open. If you keep it open, your credit score will probably increase because you lower the amount of the debt you owe while you keep the credit amount the same, which increases your credit utilization ratio. If you close the account, your credit score may drop immediately.
This is particularly the case if the credit card company simply notifies the credit bureaus that the account is ‘closed’ and not ‘closed at the customer’s request’. If the account only says ‘closed’, there is no way to know if you closed it or if the credit card company closed it because you were a bad customer. If you have a closed account with your report and do not indicate that you were the one who closed it, call the card issuer and explain the situation – and ask him to adjust the item. If they promise and do not deliver, send a registered letter in which you explicitly state that you have asked them to change the wording on the account to ‘closed at the request of the customer’. In some cases, this small change can help you qualify for a loan that you otherwise could not get.
If a credit card has no annual fees, there is usually little reason to close the account unless you do not trust yourself to keep it and not to incur debts. The longer an account stays open, the more it improves your credit score, so it’s best to keep these accounts open if you can.
However, there is a problem with keeping accounts open: if you have an inactive account for too long, the credit card company will close the account for you. A simple solution is to load something into the bill once or twice a year and pay it off immediately. This ensures that the account remains open.
Too much credit or too many debts?
Although some people are concerned that they are being refused a credit card because they have too much available credit, this is an extremely rare circumstance. People are often refused a new card because they owe too much to their existing cards, in other words, they have a high credit usage ratio. But someone with 10 open credit card accounts with a balance of $ 0 almost always has a better chance of being approved for a new card than someone with one open credit card with a max. Payout of $ 1,000.