The secret recipe for keeping your credit score high and your credit history stellar is as simple-really!-as following these steps, and then watching the magic number rise. By Sarah Kaufman, REDBOOK.
1. If you have a high debt-to-income ratio, and your credit is good, consider transferring your balance.
A lesser-known factor of determining your credit score is your utilization ratio, or the percentage of your credit limit you actually use each month. The old rule of thumb was to use no more than 30 percent of your credit limit, but that's now down to 10 percent, according to myFICO.
However, if you're already carrying a large credit card balance from month to month, but have a high credit score and good credit history, it may be time to transfer the balance completely with a zero-percent introductory period APR (annual percent rate) balance transfer credit card, says Tony Wahl, credit expert for Credit Sesame. By transferring part or all of the balance, you'll be able to pay down the principal of a higher rate card much more quickly, helping you to save on long-term interest.
But, you shouldn't think of the personal loan as a get-out-of-jail-free card. You still have to make the same monthly payments, try to contribute more than the minimum amount due, and understand the fees that associated with the card. "The trick to using balance transfer credit cards responsibly is reading the fine print," Wahl says. "Balance transfer credit cards can be particularly convoluted when it comes to fees, credit limits and APRs. Plus, most include an upfront balance transfer fee. Compare the terms of each card before applying for a new balance transfer credit card."
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2. If you don't qualify for a balance transfer card, explore consolidation.
One way to do it: take out a personal loan to pay off your credit card debt, causing your utilization ratio to go down and, therefore, your credit score to go up, Wahl says. But, in order for this to work, you must keep the credit card accounts open after you pay them off, and stop racking up new debt.
"If you borrow money, pay off your credit cards and then charge them back up again, you'll be in worse shape than ever," Wahl says. "If there is any chance you might do this, or if you find yourself doing it after you obtain the consolidation loan, stop using the cards and just close the accounts."
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3. Make up for an inconsistent payment history by starting-or continuing-to pay your bills on time.
Your payment history contributes to 35 percent of your credit score, according to myFICO, which means even if the rest of your credit history is great, late payments can still negatively impact your score.
The good news is that if your payment is less than 30 days late, it's unlikely to be reported to the credit bureaus, according to Credit.com. Even if you make, or have made the occasional 30- to 60-day late payment, it won't have too much of an impact. That's because the scoring system is largely based on predicting the likelihood that you'll make a payment at least 90 days late.
But hitting the 90-day mark even once can damage your credit for up to seven years. The biggest thing to avoid, according to CreditCards.com, is a charge-off-an accounting term used to describe the action banks take when they remove part or all of your loan from their books. They may do this if you're failing to make your payments-usually for about six months-causing your loan value to depreciate. After the bank charges off the debt, they may sell it to a third-party debt collector. If this happens, even if you end up paying the debt in full as reflected in your credit report, your lateness leaves you looking extremely risky to lenders.
That's why it's vital to pay your bills on time-even if you haven't done so in the past. To ensure that you always do this, automate your bill payments so that they're paid off on or before your due date every month, says Linda Descano, president and CEO of Citi's Women & Co. An account management service like Manilla, which sends automatic email or text reminders when a payment is due, can help keep you on track.
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4. Be cognizant of what's in your report.
Basic awareness could make the difference between a stellar and abysmal credit reputation, so check carefully for reporting errors and identity theft that could be the cause of a decreasing score, says Sam Burgoon, personal finance expert for Credit Season.
Sarah Kaufman is the editor-in-chief of the Manilla Blog at Manilla.com, a platform that helps you manage your finances, utilities, daily deals, travel and rewards programs, and subscriptions-all in one place. She is also a regular contributor to Yahoo! Finance, Good Housekeeping, Woman's Day, The Motley Fool, and The Jane Dough.
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