Understanding your credit score

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Credit card

Everyone has one. Everyone wants a strong one. Those with poor ones suffer. But few understand the mystery behind how it is figured: a credit score.

Your credit score is determined by:

  • Payment history – Paying bills on time is the best way to improve your score or keep your score strong.
  • Credit history – The longer you have had accounts, the better. Time is the factor that will give your credit score a little boost.
  • New Accounts – Be wary of opening too many accounts, especially all at once. You could appear reckless. Each new account requires a hard inquiry into your credit history and too many of those are harmful.
  • Credit utilization ratio – While opening a lot of new accounts is damaging, closing a bunch down can also have a detrimental effect. This ratio refers to how much you owe vs. how much credit you have available. Shoot for 30 percent or less to keep your credit score healthy. If you want to close some unused credit cards, try to pay any of your debt down at the same time so this ratio doesn’t get out of whack.

A great credit score is more than something to be proud of. Good financial habits lead to a good credit score which then saves you money when you try to borrow money. When you are applying for a mortgage, your excellent credit will get you a fabulous rate, a good score will get you a good rate, and a bad credit score could make it difficult to borrow the money you need.

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