Your credit score is an incredibly important part of your financial life. All your creditors will look at your score to determine whether you're eligible for credit and, if so, at what interest rate. The higher your credit score, the lower the interest rates you pay on credit cards, car loans and mortgages. Even landlords, cell phone companies and some employers look at your credit score, because if you can't be good with money, you might not be a good tenant or employee. So you want to do everything you can to make sure your score is as high as possible. Some tips:
Pay on Time.
Your track record paying all your bills, not just your credit card, is the single biggest factor in your credit score. It accounts for 35 percent of your score. So don't be late. If you only send in the minimum amount due on your credit card bill, send it in on time, even if that means you have to pay to overnight it.
Keep Your Balance Low.
The amount you owe on your credit cards as a percentage of your outstanding credit limit—known as your debt to credit limit ratio—accounts for 30 percent of your score. The best way to keep this percentage low is to make sure you don't run up a big balance. Another option is to call your card company and ask for your credit limit to be raised. For example, if you have a $5,000 balance and a $10,000 limit, you are at the 50 percent level. But if your credit limit is boosted to $15,000, your ratio is reduced to 33 percent. Be very careful here, my friends, and don't ever use that extra credit.
Build a Strong History.
How long you have had an account determines 15 percent of your score. The longer the history, the more confident a lender can be about your financial behavior. For this reason, don't cancel any unused cards, because their history will be wiped from your record. So, let's say you no longer use a card you took out 10 years ago, because you got a better deal elsewhere. That's fine; just stick the card somewhere safe and sound, but don't cancel it outright. Even though you aren't using the card, you still want to use the history.
Don't Be a Credit–holic.
Potential lenders hate to see you applying for a lot of credit; it makes them think you're going to get in way over your head with debt. Your pattern of opening new accounts, or applying for new accounts, determines 10 percent of your grade. One important caveat: If you confine your mortgage shopping to a two-week period, all those applications (and lender requests for your credit score) will be bundled together and count as only one request on your record.
Watch Your Mix.
You don't want to have a ton of open credit lines or loans. Your mix of credit cards, retail cards and installment loans accounts for the final 10 percent of your score.
From the November 2004 issue of O, The Oprah Magazine
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