3 steps to an excellent credit score

Before you go, we thought you'd like these...
Before you go close icon
An excellent credit score can unlock low interest rates on mortgages, auto loans and credit cards. In many states, a good score is also the key to lower auto insurance premiums. Although there are hundreds of credit scores out there, FICO remains the industry standard and isn't shy about telling people how to improve their scores. If you want to have an excellent score, you should follow these three steps.

Always Pay On Time

The single most important part of your credit score is making payments on time. Even a single missed payment that becomes thirty days late could take 90 points or more from your credit score. Banks use credit scores to predict whether or not you will make payments on time in the future. It should not be surprising that the most important part of a score is how often you have made payments on time in the past.

To make sure you never run the risk of missing a payment, sign up for automatic payments with your creditors. By automating your monthly payments, you can ensure that you avoid a big, unexpected hit to your score.

In addition, be particularly careful with your medical bills. If you don't pay your doctor or hospital bill on time, it could quickly end up with a collection agency and on your credit report. Even a small medical bill can have a big negative impact on your score.

Keep Your Credit Card Balances Low

The second most important part of your credit score is the total amount of debt that you have. FICO tends to treat some debt as good debt, and other debt as bad debt. Mortgages, auto loans and student loans are considered good debt. Credit card debt is considered bad debt. In particular, you can lose a ton of points if you max out your credit cards.

FICO uses a measure called "utilization" to determine how risky you are. You calculate utilization by dividing your current statement balances on all of your credit cards by your credit limits. If you have $10,000 of credit limits and a $1,000 balance, your utilization would be 10%.

In general, people with the best credit scores have a utilization ratio of 10% of lower. To keep your utilization low, you should pay down credit card balances and avoid closing old credit card accounts. If you close an unused credit card, you will be reducing your credit limit and increasing your utilization.

Feed Your Score With "Good" Activity Every Month

Do you remember your days in elementary school, when you would get a "gold star" for a job well done? Your goal with your credit score is to accumulate as many "gold stars" as possible. And that means using a credit card each month responsibly. Ideally, you will use less than 10% of your available credit with transactions each month. You will then pay your statement balance on time and in full every month. By doing that, you are showing that you have self-restraint (by not maxing out your credit cards) and responsibility (by making your payment on time). Every payment you make is a "gold star." And your goal is to repeat that behavior every month.

You Don't Need To Pay Interest To Get A Good Score

Contrary to a popular credit score myth, you do not need to go into debt and pay steep interest bills in order to get a good credit score. The MagnifyMoney Credit Score Guide explains that "carrying a credit card balance month to month and paying interest will not boost your credit score any more than paying in full each month. Just having one credit card and paying it off on time and in full can lead to an excellent credit score."

It is very easy to keep a good credit score. Just make your payments on time, keep your balances low and repeat your behavior every month. The best way to ensure you keep your score high is to automate responsible behavior.
Read Full Story

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

People are Reading