Less is More – Basic Formula on Cutting Credit Accounts

by Darren Cason

Your credit score gets tabulated based on a number of criteria, which is supplied to the credit bureau companies by lenders themselves. They report when you’ve been naughty, they report when you’ve been nice. This data and other factors make up that score, which varies slightly between the three major credit bureaus, you weigh certain categories more or less than the other two when determining scores.

Your credit score, or FICO score after the Fair Isaac Corporation, is the prime factor in whether you’ll be approved for a loan or not, and what interest rates you’ll get on that loan. It also has an effect on your insurance rates, and may even affect your ability to get a job, with more and more employers consulting the reports to determine the reliability of the applicant. FICO scores range on a scale from 300 to 850, with higher scores being better, an 850 score pretty much representing a spotless history and outlook, which is actually quite rare. In general, you need a score upwards of 700 to qualify for most loans and get better rates on them than you otherwise might. We’ll look at some of the basic tips you can use to help improve your score to get those juicy loans and rates.

Pay bills on time

Yeah, this is about as basic a concept as you can get, yet most of us are late on bills multiple times throughout, often for reasons that aren’t even related to money. Depending on how the bill must be paid, we may be too lazy to go out and take care of it, or may simply forget to pay it on time. Make it a habit of leaving all of your bills in a prominent location where you won’t forget about them, and don’t dilly-dally on paying them. Even a day late could be enough to scar your credit score.

If you’re late with a payment for whatever reason, at least make it a point to contact the creditor and explain the situation, while clearly defining when payment will be made. As a sign of good faith, and especially if you’ve had a good payment history to that point, creditors will often avoid contacting the bureaus about your late payment. Communication with your creditor is the key, like it is in so many other relationships.

Keep low balances on your cards

Rather than paying off your credit lines in full each month if you have that capability, leave a small balance owing on the card each month, demonstrating to potential lenders that you can handle money responsibly and are not simply making the payments each month because your financial situation allows it. You’ll be paying a small amount extra each month by going this route, but the increase in your credit score could equal plenty more in savings down the line.

Avoid too many new accounts

While it may be tempting to open a good number of accounts for the sake of options, and you may in fact think that this helps your score as well by demonstrating you can handle multiple accounts and keep them in good standing, it will in fact hurt your credit score. The more accounts you have makes you a greater credit risk, no matter your past payment history. New accounts will also weaken your accounts’ average age, which also plays a role in your score.

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