One of the most difficult things you can do in your adult life is to build a solid credit history and maintain that history over time. Having a positive credit history means you have long-term success in managing your credit. Your credit score is made up of five main components, all of which have to be juggled properly to create the best credit profile possible.
Payment History
The most important factor in building a good credit history is having a blemish-free history of on-time payments. By paying on time every month, you're showing the credit bureaus that you're a good credit risk because you're able to pay at the agreed terms. Submitting timely payments also ensures that you won't get hit with the late fees and penalty interest rates that are synonymous with late payments. Payments made more than 30 days late can stay on your credit file for up to seven years, so missing payments can hurt you long term as well as short term.
Credit Balances
Your outstanding balances on your cards comprise the next most important aspect of your credit score. Your balances, particularly in relation to your credit limits, count for about 30 percent of your score. This means that if you routinely carry a balance on your credit cards, you're at risk for a lower credit score. The trick to building a good credit history is managing your balances well and not letting them get close to your credit limits.
Age of Accounts
Building a good credit history doesn't happen overnight; it takes years of responsible credit management. To that effect, the age of your credit accounts comes into play when your credit score is calculated. Old accounts show that you've been able to manage your credit successfully over a long period of time, whereas a slate of new accounts doesn't say much about your long-term responsibility. For this reason, credit experts recommend keeping older accounts open even if you've paid down your balances.
Credit Inquiries
The number of times you've applied for credit recently is a factor that makes up 10 percent of your credit score. The theory is that if you've recently applied for multiple lines of credit recently, it could be a sign you need cash quickly, an indicator that you haven't planned ahead. Creditors could see this as a sign that you may be a risk to behave in a similar way in the future. To build a good credit score, you should only apply for credit as needed. There will be times where you have multiple lines open for legitimate reasons, but the other factors of your credit score will show this.
Credit Mix
The last factor in creating your credit score is your mix of credit accounts. The credit bureaus like to see a diverse array of accounts in your name; a mortgage, a car loan and a couple of credit cards show a nice mix of installment and revolving accounts. Such a mix can also help you. If you keep your credit card balances low, you can better predict how much you owe to your creditors each month.
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