With 2015 just around the corner, it’s easy to neglect your credit score amidst holiday shopping and celebrations. Be mindful that increased credit card use during this time could affect your credit score. To prevent issues in the new year, here are some key points to keep in mind about how your credit score can change.
The first step to managing your credit is understanding what affects it. Don’t be misled by myths around the well-known FICO score, which ranges from 350 to 850. This score measures the risk of someone defaulting on a loan. While many sites offer different versions of a “credit score,” your true FICO score is dynamic and can change each time a report is pulled. This means your score could shift significantly in a short period.
Several factors influence your credit score. For example, 15% of your score is based on the average length of time you’ve had credit. Even if you have no credit history, starting with a secured or unsecured credit card can help you build one. If you already have a well-established credit history, avoid closing old accounts, as this could negatively impact your score. Instead, keep but don’t use these older cards to maintain your credit history.
Another 30% of your FICO score is based on your current balance relative to your credit limits. It’s best to keep your balances below 30% of your limit (for example, a $300 balance on a $1,000 limit). During the holidays, people often put all their shopping expenses on one or two cards, which can lead to high balances and affect their score. To avoid this, spread your purchases across multiple cards.
Your payment history makes up 35% of your score. This includes how timely you’ve been with payments on all your accounts. Late payments and debts that go into collections can seriously damage your score. If you spot any errors in your credit report, contact the credit bureaus to correct them. Clearing any collections before the new year can also help improve your score.
Your credit mix accounts for 10% of your score. Lenders like to see that you can manage various types of credit, such as car loans or mortgages, responsibly. Another 10% comes from new accounts and inquiries for new credit. Multiple inquiries for new credit lines can signal financial instability to credit bureaus, which might lower your score.
By understanding these factors, you can significantly improve your FICO score over the next month. This proactive approach will help you start the new year with a stronger credit profile.
Enjoy the holiday season and remember to keep an eye on your credit!