This story is part of the CNBC Make It’s One-Minute Money Hacks series, which provides simple, straightforward tips and tricks to help you understand your finances and take control of your money.
To increase your credit score, you first need to know the factors that agencies take into account when calculating it. For your FICO score, the score most commonly used by lenders, there are five main considerations.
Your FICO score is between 300 and 850. The higher the score, the more willing lenders are to lend you money for housing, cars, credit, etc.
The average American has a credit score of 711, according to ValuePenguin. It’s “good” when it comes to credit, but having a “very good” (between 740 and 799) or “exceptional” (between 800 and 850) score will get you the best credit and loan deals.
Your FICO score is determined by five factors, which are weighted differently:
- Payment history: 35%
- Amount: 30%
- Length of story: 15%
- New creditt: 10%
- Types of credit used: ten%
The most important factor is payment history, which means you pay your bills on time and in full every month. Doing this over time will increase your score. But if you miss a payment or fall behind, your score will drop.
That said, while you may want to pay your entire bill to avoid accruing interest, making the minimum payment each month is enough for a full payment on your credit report. If you can’t pay your entire bill, make at least the minimum payment to stay in good standing.
The second most important factor is the amount you owe or the rate of use of your credit. It’s how much of your total credit line you’re using at any given time, and ideally you want to keep it low: experts say keep it below 30%.
If you have a credit card with a $ 10,000 limit, aim for a balance of no more than $ 3,000 at a time. You can do this by limiting your spending, making payments throughout the month, or requesting an increase in the limit.
The rest of your FICO score is based on how long you’ve been opening credit accounts (the longer, the better); the last time you applied for a new credit card (if you apply for too many accounts in a short period of time your score will drop); and the variety of credits used.
Maximizing all of these factors is important to having a high credit score, but prioritizing payment on time and in full will definitely give you the biggest boost.
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