There is something in your life that is extremely important, but often overlooked. No, it’s not your family or your home. It is, instead, your credit score. Your credit score is really important because it dictates several things for you. It dictates how much of a loan you may get, what your interest rate will be, and how reliable and respectable you appear toward companies. As you can see, your credit score plays a huge role in your life from a financial perspective.

The average credit score in the United States sits around 680. That’s not bad, but it’s certainly not amazing. Chances are, if you’ve got a ton of debt, your credit score is actually considerably lower than that.

Do you know what causes your credit score to decrease? A lot of people don’t, which is why their credit score is hurt in the first place—they do not know what to do to prevent their credit score from dropping. In this article, we’ll go over the seven factors that drop your credit score. These factors are:

• Payment History
• Amount Owed
• Level of New Debt
• Closing Accounts
• Length of History
• Fines
• Bankruptcy

Each of these factors are covered thoroughly below.

Factor #1: Payment History

Payment history makes up 35% of the credit score. That means that if you have a poor payment history, it can have a profound effect on your credit score. For example, if you make a single late payment—be it a credit card, mortgage or car payment—it can lower your score by as much as 100 points. That sounds like a lot, doesn’t it?

What if you are late on not one payment, but two? Then your credit score may go down by another 50-100 points. After losing 150-200 points, your credit score may stand at a poor 500. Repairing such a great loss can be extremely difficult, which is why you should always make every payment on time.

Factor #2: Amount Owed

Responsible credit card use can actually be a good thing for your credit score. What isn’t a good thing, though, is owing a ton of money. Even if you maintain a superb payment history, if you owe a lot of money, your credit score will still be negatively affected. So how much is a safe amount to owe? That depends on what your credit limit is for each credit card.

Let’s assume you’ve got a $2000 credit limit on your card. The same amount to owe is 35% of this limit or less. If you owe more than 35%, it will hurt your credit score. Also, having credit card debt that exceeds $5000 overall can really hurt your score.

Factor #3: Level of New Debt

Every day, people often receive several new credit card offers. This is particularly true if they have a good credit score. Did you know that opening up too many new credit cards in a short period can hurt your score? Well, it can. While it may be tempting to open up as many credit card accounts as possible, you should try to limit yourself to no more than 1 or 2 every 6-12 months. That way, you do not open up too many accounts at one time. It may be hard, but it will save you in the long run.

Factor #4: Closing Accounts

You’ve decided to stop using a charge card or two. Common sense tells you to close the accounts so that you cannot use them again. However, from a credit score standpoint, this is not a logical thing to do. In fact, closing your accounts before they are paid off can hurt your credit score because it signals that you have simply given up on the card. It also takes away a positive reference because you are closing an account that has been kept in good standing. So whatever you do, do not close the account until it is fully paid off. Otherwise, you’ll be doing more harm than good to your credit score.

Factor #5: Length of History

Another key factor that can drop your credit score is the length of history of your card. If you’ve had a card for a year or two, have debt on it and close it before it is paid off, this will negatively affect your credit score. Even if you have paid it off, it is considered bad practice to cancel a card after just a few years of use. What helps your credit score is to have long-standing, good accounts. What hurts your credit score is to cancel accounts prematurely. Don’t make this costly mistake.

Factor #6: Fines

We’re not talking about the typical late payment fines. Instead, we’re talking about everyday fines like parking tickets, library late fees and any other fine. Increasingly, these fines are being turned over to collection agencies. When these fines become delinquent and are in collection agencies, your credit score is negatively impacted. In fact, a single bill placed in a collection agency can shave as much as 100 points off your credit score. So never, ever allow any debt to get to the point where it is sent to a collection agency. Pay your late fines and tickets and you’ll be alright.

Factor #7: Bankruptcy

Bankruptcy may take a load off your back, but it also sends your credit score to the gutter. That’s because the bankruptcy shows that you could not pay off all the debt you accumulated, and so you appear to be someone that has simply given up. This makes you extremely unappealing to potential lenders and potentially decreases your credit score by hundreds of points. The bankruptcy also stays on your record for many, many years afterwards. In essence, a bankruptcy does a whole lot of harm to your score and this harm may never be reversed.

If you are able to take all the above into consideration and avoid making the mistakes mentioned, you can prevent your credit score from dropping. That’s something that every credit holder should strive to do.

With the bad rap that credit cards have gotten, you’d think that they’re pure evil. While credit card use has the ability to destroy reputations and credit, responsible credit card use can actually help you establish good credit. That probably sounds a bit crazy, but it’s actually true. If you use your credit cards responsibly, you are showing perspective lenders that you are a good, reputable person to loan to. As a result, they’ll be willing to give you loans at good interest rates.

One of the pitfalls with credit cards is that most people do not know how to responsibly use them for the right reasons. Thus, they fall into deep debt which harms their credit. You’re probably wondering “how can I avoid this pitfall?” Well, it’s actually pretty easy, provided you are able to use some self-control when reaching for the credit card. We’ll give you seven easy, quick tips for making sure you use those credit cards the right way.

Tip #1: Never Charge More Than You Can Afford

This seems like an obvious tip, but it’s something that most people do not follow. Often times, when we are given a piece of plastic that enables us to charge thousands of dollars and not have to pay that back for a certain amount of time, we are tempted to charge as much as possible. Even if we can’t afford to pay for all the stuff we charge, we still do it because it feels great to buy things. Indulging makes us happy. However, once you receive the first bill and realize you cannot afford it, you are often shocked and unsure how you’ll be able to pay it.

How can you avoid this? By simply not spending more than you can afford! Before you go to charge anything, think about the purchase. Is this something you can afford to pay for within a month or two? If not, do not purchase it.

Tip #2: Pay Back the Entire Balance at the End of the Month

For years many financial experts have recommended this obvious tip. Despite how well-recommended it is, many people neglect to do it. Carrying large debt balances from month to month, even if the payments are made on time, is bad for your credit. That’s why paying off the entire balance at the end of each month is so crucial—it lets creditors know that you are serious about paying back any debt you may incur. To make this tip really work for you, you must make use of tip #1 which is to not overspend. If you spend more than you can afford to pay back in one month, you will not be able to pay it all back at the end of the month.

Tip #3: Never, Ever Use Your Credit Cards to Pay Off Other Debts

A lot of people who cannot afford to pay one bill may use another credit card to pay it. This is really destructive behavior, as it only puts you further in the hole. Even though it may seem like a good idea at first, the debt always catches up to you and it is often worse than the first time. So do not ever use a credit card to pay off another bill, as it will only harm your credit rating and put you even closer to going bankrupt.

Tip #4: Keep Track of All Credit Card-related Purchases

When you use your credit cards to make a purchase, be sure to save every single receipt. This allows you to see how much money you have spent before receiving the monthly statement. It also allows you to potentially spot any errors the credit card company could make in regards to your billing statement. Finally, it holds you accountable—just seeing how much you’ve spent in the past day or week can prevent you from making purchases that you cannot afford.

Tip #5: Always Pay Before Due Date

One of the huge mistakes many people make is to not pay their credit card bills on time. As a result, late fees begin to accumulate, making it even harder for credit card holders to pay back their debt. The simple way to avoid this problem is to pay your bills before the due date—if possible, send out the money a week before the date, so that there is adequate time for the money to reach the company. Doing so prevents late fees from ever happening.

Tip #6: Don’t Use Credit Cards for Every Single Purchase

It is tempting to abandon cash and checks and use credit cards for most, if not all purchases. However, this really isn’t a good idea. You have to remember that on every purchase you make, there is an interest rate. If you’re spending $25 on a t-shirt and use a credit card to pay for it, you may actually be paying $35 on the shirt once interest is factored in. For one item, this may not sound like much. But if you do this several more times, the money begins to add up. That’s why you should avoid using credit cards for every purchase. Try to use credit cards only when absolutely necessary.

Tip #7: Before Making a Big Purchase with a Credit Card, Think About It

Before making a big purchase using a credit card, most responsible credit card users take the time to think the purchase through. They may ask themselves the following questions:

1. Can I afford to pay this back within a month or two’s time?
2. Do I absolutely need this item right now?
3. Would it be better for me to simply wait a month or two to save the cash and pay for the purchase with money and not a credit card?

The answers to the above questions will tell you whether or not you should use a credit card to purchase the item in question. If you can afford to pay it back within a month or two’s time and need the item now, charging is probably a good idea. If not, you should simply wait and save your money to purchase the item without the use of a credit card.

By applying the above tips to your credit card use, you can become a responsible credit card user. Good luck!

9 Tips For Improving Your Credit Score

There are many things in life that are very important. Something that many Americans overlook is their credit score. Credit scores are incredibly crucial, as they dictate how much of a loan you may be eligible for, how much interest you’ll pay and what credit cards you may qualify for. They even influence how much of a student loan you or your child could be eligible for.

Most Americans don’t know that they qualify for a free credit report each year. This credit report details any outstanding debts they may have, plus tells them what their credit score is. If you haven’t already taken the time to get your free credit report, please do so now. Once you know what your credit score is, you’ll know what to improve.

If your credit score is less than satisfactory, you’ll probably want to take the steps necessary to improve it. In this article, we’ll be going over the steps to take to improve your credit score. By improving your credit score, you will make your reputation better which will allow you to secure necessary loans at good interest rates.

Tip #1: Pay your bills on time

One of the leading reasons why credit scores are hurt is because bills are not paid on time. Thus, one of the easiest ways to improve your credit card score is to simply pay your bills on time. If you can, you may even want to pay your bills a bit ahead of time. Doing so will tell creditors that you are faithful about paying your debts back and will also increase your credit score.

Tip #2: Don’t Carry A Lot of Debt

The average debt an American carries is around $8,000. While it is assumed that as long as you pay the bills on time, you’ll have a good credit score, this isn’t always the case—especially if you have a lot of debt. Try hard not to carry too much debt and, if you already have a lot of debt, make efforts to pay it back as quickly as possible. By carrying too much debt, you are only making yourself look bad.

Tip #3: Make Payments Above the Minimum

One common assumption is that as long as you make the minimum payment on time, your credit report will be good. That’s not really true. As a responsible credit card user, you should strive to make payments above the minimum. Not only will it help your credit score, but it will also allow you to pay off the debt quicker. By paying just the minimum payment on a $4,000 debt, for instance, it may take you as long as 20 years to pay it off. However, if you pay just $10 above the minimum, it won’t take you that long to pay of the debt. So always try to pay more than the minimum to help reduce your debts quicker.

Tip #4: Take a Close Look at Your Credit Report

Many people assume that the credit report is always correct. Occasionally, though, mistakes may be made which hurt a person’s credit score. Have you noticed any inconsistencies on your credit report? If so, contact the creditor associated with the debt or your local credit agency and report the issue. In most cases, the creditor/credit agency will remedy the problem and your credit score will be raised. Correcting inconsistencies on your report is by far the easiest way to improve your credit score.

Tip #5: Make a Habit of Consistently Paying Bills on Time

Your credit score will not improve overnight. It usually takes a lot of time and good habits to improve your credit score. Establish a history of paying bills on time (and ahead of time) and of making above minimum payments. After a period of time, you will earn the reputation of being a good person to loan to, and, as a result, you will have a higher credit score.

Tip #6: Don’t Apply for Lots of Credit at Once

People are bombarded with new credit card offers all the time. While it may be OK to sign up for a new credit card here and there, it is a bad idea to sign up for several at once. This sends a signal to creditors that you are desperate for credit and are a risk to loan to. This also reduces your credit score. Resist the urge to sign up for many credit cards at once and don’t overextend yourself.

Tip #7: Never Exceed 35% of Balance Limit

When given a $3,000 credit limit, for instance, many people try to use as much of it as possible. That’s really not a good idea, as using as much as possible creates a debt that is unmanageable. One of the keys to achieving a great credit score is to learn how to effectively manage debt. You should never exceed 35% of the credit limit. So if you have a $3,000 credit limit, don’t use more than $1,050 of it.

Tip #8: Pay Off Debt Instead of Transferring It from One Place to Another

Ever seen a credit card offer with a low transfer rate and entertained the thought of transferring other credit card debt to the new card? It’s something that many Americans consider and it is something to avoid if you intend on improving your credit score. This is because transferring one debt to another card makes you look bad because it shows that you weren’t able to pay it back one way and had to resort to moving it around. That’s why you should just keep the debt in one place and pay it off, rather than moving it all around.

Tip #9: Don’t Close Accounts if You Still Have Debt Remaining on Them

Closing accounts before they are fully paid is a huge mistake to make and it hurts credit scores. If you are planning on not using a certain credit card anymore, you should wait to close it until after you have paid it off. In order to keep yourself from charging, simply cut up the card into pieces and keep it in a drawer. One other thing to remember is to never close an account around the time of a loan, as this can also harm your credit score.

By doing the above things mentioned, you can improve your credit score and your reputation.

Many people hear this term, yet few actually know what it is. This is a number that can control every aspect of your life. The credit score is a number ranging from 300 to 900 that reflects the credit worthiness of a borrower, and is primarily determined by timeliness of past loan payments. Lenders calculate this number with the assistance of computer systems as part of the process of assigning rates and terms to the loans that they make.

Who Is FICO?

FICO stands for Fair Isaac & Co. A FICO score is a credit score developed by Fair Isaac & Co. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrower’s credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable. FICO scores are available through the entire major consumer reporting agencies in the United States and Canada: Equifax, Experian and TransUnion. (FICO is a registered trademark of Fair Isaac Corporation).

Credit Score Breakdown

Your credit score is calculated in a very similar manner to how you would earn a grade in a classroom. A teacher calculates grades by taking scores from tests, homework, and attendance, weighting each one according to importance in order to come up with a final total. A credit score, like these scholarly gradings, use a combination of values to achieve a final result.

The number itself can range from 300 to 900. The formula for exactly how the score is calculated is proprietary information and owned by Fair Isaac. Here, however, is an approximate breakdown of how it is determined:

35 percent of the score is based on your payment history. One of the primary reasons a lender wants to see the score is to find out if (and when) you pay your bills. Thus, this is obviously the most important piece of information, and is weighted most heavily. The score is affected by how many bills you have paid late, and if any bills were sent to collections any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall score.

Late payments are not an automatic “score-killer.” An overall good credit picture can outweigh one or two instances of late payments. However, having no late payments in your credit report does not mean you will get a “perfect score.” 60%–65% of credit reports show no late payments at all. Your payment history is just one piece of information used in calculating your score.

30 percent of the score is based on outstanding debt. How much you owe on car or home loans falls into this category. Having credit accounts and owing money on them does not mean you are a high-risk borrower with a low score, however, when a high percentage of a person’s available credit has already been used, this can indicate that a person is overextended, and is more likely to make payments late or not at all. Credit cards that are at their credit limits also inversely affect this amount. The more cards you have at their limits, the lower your score will be. The general rule of thumb is to keep your card balances at 25% or less of their limits. Even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.

15 percent of the score is based on the length of time you have had credit. The longer you have had established credit, the better it is for your overall credit score. This is because more information about your past payment history gives a more accurate prediction of your future actions. If you have been managing credit for a short time, do not open many new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you do not have a lot of other credit information. Even if you have used credit for a long time, opening a new account can still lower your score.

10 percent of the score is based on the number of inquiries on your report. If you have applied for a lot of credit cards or loans, you will have many inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you have not used the cards or gotten the loans). The more recent these inquiries are the worse for your credit score. FICO scores only count inquiries from the past year.

10 percent of the score is based on the types of credit you currently have. The number of loans and available credit from credit cards you have makes a difference. There is no magic number or combination of types of accounts that you should not have. These actually come more into play if there is not as much other information on your credit report on which to base the score. The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not necessary to have one of each, and it is not a good idea to open credit accounts you don’t intend to use. The credit mix usually will not be a key factor in determining your score – but it will be more important if your credit report does not have a lot of other information on which to base a score.

These are the five factors that determine your Credit Score. Hopefully, by reading this, you will be able to implement greater efficiency in improving your score.