Though no one plans to have a poor credit score, sometimes life throws you a curveball that results in exactly that – a credit history that's badly damaged. More often, however, low credit scores result from repeated mistakes. For Millennials who may be new to managing credit and financial activities, making regular rent payments or paying down student loan bills, protecting a credit score might not seem like a big deal until it comes time to borrow more money.
Keep in mind that your credit report is a record of your credit history filled with information from various creditors and lenders you've used, while your credit score is the numerical value that's been placed on your credit history. Before requesting either a credit report or score, make sure you read the fine print. While some companies might offer a "free" report or score, there could be hidden fees, which can occasionally be reoccurring.
Here are five tips to help keep your credit score as undamaged as possible. Good credit is a huge factor in whether you'll be able to get future mortgages, car loans and credit cards.
Pay Off & Close Delinquent Small Loans, Credit Lines & Credit Cards
One important activity that may help prevent a bad credit score is cleaning up your credit report by paying off small balances on open credit products, and then closing them – particularly if they have a history of late payments and other delinquencies. Accounts like these damage your credit score because they show an irresponsible repayment pattern. Another way they can hurt you? Many small accounts can be difficult to keep track of when life gets busy, leading to more missed payments.
Keep Your "Good" Credit Accounts Open
Look at the credit accounts that you've had for a while. If you don't use them often, you may think it's a good idea to close them. Before you do, examine each one closely. If you have an account with a history of payments made in full and on time, and you've had the account for a while, consider keeping it open. An account like this provides a history that shows you can pay your debts responsibly. As long as you continue to keep it operating without any issues, it will help your credit score.
Don't Apply for More Credit Until Your Credit Score Has Improved
If you are a new borrower and have had credit for only a short time (less than two years), your credit score may still be low. This isn't because you aren't a responsible borrower, but simply because you don't yet have enough history to show that you are a responsible borrower.
Although you may think opening additional credit products (even if you don't need them) will improve your credit score, don't. Only apply for what you think you need and don't go after additional credit until your score has improved. This is because one of the factors affecting your score is the number of open credit balances. For a record of just how many balances you have, check your credit report for free once a year.
Make Your Payments on Time and in Full
One of the most common ways to tarnish your credit score is by falling behind on monthly payments. Lenders, landlords and utility/service providers (such as power, heat, phone, internet and cable companies) report to credit bureaus on a regular basis. What they say affects your score, and if you are repeatedly behind on your bills, your score will start to slide.
To keep this from happening, make all debt payments, rental payments, utilities and bill payments (including your cell phone) on time, every time. If you have a hard time remembering when to pay what, use a reminder system. This may be as simple as noting upcoming payments on your wall calendar or paper planner, or using a free smartphone app, such as Bills Reminder for Android phones or Bills Monitor for iPhone.
Pay Down Your Credit Card Debt
Another important factor in keeping a credit score from slipping is how close your revolving credit balances, such as those on credit cards or credit lines, are to your credit limits. Do everything you can to keep your credit balances well below your limits – a good rule of thumb is to only use 30 to 35% of your available credit. When your balance starts to creep up, it's very easy to actually slip over the limit, due to interest charges and/or missed payment fees. Not only will this have a negative effect on your credit score, you will likely have to pay an additional fee to your creditor.
The Bottom Line
Taking responsibility early on in your financial life will help you avoid getting a bad credit score. This isn't just good for your conscience, it's also good for any hope of obtaining a mortgage or car loan in the future. Easy ways to avoid bad credit include making payments on time and in full, paying down debt and limiting credit products when first establishing credit. Just apply for what you need right now, then wait until your score improves before getting more. Keep open any accounts with a great payment history, otherwise pay off and close smaller accounts with poor payment history.