If you’re like many people, you believe that as long as your credit card bill and other recurring debts are paid on time each month, you must have a great credit score. Right?
Unfortunately, earning and maintaining a good credit score isn’t nearly as simple as you might think. While timeliness and credit utilization play a major part in determining your score, there are a number of other factors that come into play – and some aren’t so obvious. Take a look at some of the issues below and see if you can improve your score.
Little-Known Factors That Impact Your Credit Score
1. Municipal Debts
If you were to skip your credit card, auto loan, or mortgage payment, you’d expect your creditor to report it to the bureaus. But these aren’t the only accounts that can be reported. Depending on where you live, your city government may notify the credit bureaus of unpaid parking tickets, unpaid city taxes, and even library fines. Indeed, these small, seemingly unimportant debts can bring down your credit score and prevent loan approvals.
To keep your credit in tip-top shape, view all your debts as a priority. If you don’t have sufficient cash to pay a city debt, call your local government to set up a payment plan.
2. Having No Current Loans
If you have several credit cards in your name, but no loans, your credit might suffer. Credit scoring systems reward consumers who diversify and have different types of accounts in their name. Plus, revolving debts, which include credit cards, are viewed less favorably than loans. For example, a consumer with a couple of credit cards, a mortgage loan, and an auto loan will likely have a higher FICO score than a consumer who only has a few credit cards, despite the fact that the former likely carries more debt.
This is not to suggest that you should apply for a bunch of loans simply to improve your score. However, if you’re considering buying a new car or taking out a student loan, as long as you can afford the payments, it could give your credit score a boost.
3. Cash-Only Shopping
If you see yourself as a smart consumer, you likely pride yourself on making wise financial moves. One of these smart moves may be to only pull out a credit card when absolutely necessary, as this is an effective way to avoid debt. If you think this move will help your credit, however, you’re sadly mistaken.
In fact, not using your credit card is the fastest way to reach a credit score plateau. After six months of inactivity, your credit card company may stop reporting to the credit bureaus, or worse, cancel your account entirely. Both actions can lower your score. To avoid this, dust off your credit cards every few months and make small purchases. You could make a point to pay for gas, groceries, or dinner at a restaurant, for example, for one week every other month. Just pay the balance in its entirety when or before you receive the statement.
4. Closing Accounts
Paying off your credit card balance is a major milestone, and if you close a credit card account once you reach that goal, you may feel liberated. However, breaking ties with your credit card company doesn’t have huge benefits.
If you don’t understand how credit scoring works, you may inadvertently lower your FICO score. While eliminating debt is smart and can propel your score to prime status, closing an account has the opposite effect. In fact, it’s worse than not using your cards. Canceling or closing accounts can reduce the length of your credit history, which is important because the length of your credit history makes up 15% of your credit score. Close your oldest accounts, and you’ll decrease your credit history by years.
A safe approach is to pay off balances, but keep accounts open. If you feel that you have too many accounts and you’re adamant about closing a few, start with your newest. And don’t close multiple accounts at the same time. Close one, wait a few months, and then close another.
Learning all you can about credit is the trick to maintaining a good score. Don’t be alarmed by a drop of a few points, as it’s common for credit scores to fluctuate slightly. Several factors can cause this, such as a credit inquiry, a new account, or a balance increase. As long as your overall credit picture is good and you avoid credit blunders, such as filing for bankruptcy, maxing out credit accounts, and excessive credit inquiries, you’re on your way toward better credit and an A+ score.
What other tricks do you know to improve your credit?