One of the basics of personal finance in our current system is the need for a good credit score. Your credit score is seen as a reflection of your financial reputation. The higher your score, the more likely you are to get access to the services you need — and get them at a better rate.
If you’ve already built your good credit score from scratch, you might need some help maintaining that score. In fact, you might be surprised at how quickly your score can drop if you make a few mistakes.
Here’s what you need to know about keeping your score up to scratch.
Make Payments on Time and In Full
In credit scoring, your payment history has the most weight. Whether you make your payments on time and in full accounts for 35% of your credit score.
Depending on the account, you might see a payment history going back years. Credit cards, especially, report your payment history accurately. You’ll see each month whether you paid late or on time.
On top of that, you might even be dinged if you don’t make your full minimum payment. The best way to maintain a good credit score is to focus on making your payments on time. When you pay on time, you build a positive history.
What Happens if You Miss Payments?
When you miss a payment, it can bring down your score. However, it’s vital to realize that the better score, the bigger the impact of a missed payment. For example, if your credit score is only fair, a missed payment may only drop your score by 20 to 50 points. On the other hand, if you have excellent or good credit, your score could be impacted by up to 100 points — or more.
Considering that the scale runs from 300 to 850, a hit like that could be major. A single missed payment could be the difference between getting the best possible mortgage rate and getting a rate that isn’t nearly as good. That could cost you thousands of dollars over the life of your loan.
What Should You Do If You Can’t Make a Payment?
In order to reduce the impact a missed payment can have on your credit score, it’s important to be proactive as you move forward. If you’re in an emergency situation and you face a hardship that won’t allow you to make your payment, let your creditor know.
During times like the coronavirus pandemic, some creditors are allowing you to skip payments (and move them to the end of the term), letting you go on forbearance.
In the case of student loans, if you have a big income drop and can’t make your payments, contact your servicer and get on an income-driven repayment plan if you qualify. This can help you avoid skipped payments and help you maintain your credit score, even if you aren’t making the same payments as before.
Pay Down Debt When Possible
Make sure that you’re paying down debt as much as possible. If you don’t currently have debt, you can maintain your good credit score by avoiding it in the future.
Try to pay off your credit cards each month. You’ll avoid interest, and keep your credit utilization low. Many experts suggest that your ratio of available credit to used credit remain below 30%. However, it’s always better if you can keep it as low as you can.
Also, consider seeing what you can do about raising your credit limits to improve your credit utilization. If you mostly make on-time payments, you might be able to increase your credit limit on a card. This can provide you a little more room, just in case, and improve your credit utilization.
Know What Type of Accounts You Have
Different accounts can lead to a slightly better score — or at least keep you from losing ground later. A good mix of revolving accounts (like credit cards) and installment accounts (like car loans and student loans) can help you maintain a good credit score.
Some people, when they pay off a mortgage early, find that they end up with a slightly lower credit score because of the difference in their mix. However, this doesn’t mean you should go out and open loan accounts just to maintain a mix. Be aware of where you’re at, and avoid overextending yourself.
For the most part, though, if you just focus on keeping your debt levels low and making on-time payments on your credit cards and other loans, you’re likely to maintain a good credit score. Other changes probably won’t have a huge impact on your score, as long as you aren’t missing payments.