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Your current credit score is the starting point for your journey toward building credit or restoring it after a setback.
The next step is understanding how the way you handle your finances affects your credit score. Two things matter much more than any other: paying on time and how much of your credit limits you use.
Paying on time matters most
Paying on time is the single biggest factor in your credit score — and for credit-scoring purposes, “on time” is within 30 days of the due date. It's virtually impossible to add points to your score if paying late is a habit. Worse, accounts at least 30 days past due can stay on your credit record for as long as seven years.
How to stay on top of payments
Set up automatic payments to cover at least the minimums due, assuming you reliably have enough in your bank account to avoid overdrafts. You can set up alerts to let you know a payment is coming up.
If you have an account that’s overdue, it’s important to try to catch up, because damage to your credit score gets worse as a payment goes from 30 to 60 to 90 or more days late.
As a previous late payment fades into the past, the damage to your credit lessens. You also can dilute its impact by stacking up positive information: making sure all bills are paid on time, and perhaps by opening a new credit line. If you have a close friend or relative who has excellent credit and is willing to add you as an authorized user to their credit card account, your score can benefit from their payment record. (They don’t need to give you the card or let you make charges; just being on the account can help you.)
Credit card balances have a big effect
The balances on your credit cards affect your score almost as much as on-time payments. In general, the less of a credit card limit you use, the better for your score. In credit-speak, this is credit utilization, and it's expressed as a percentage. Most experts advise using no more than 30% of your credit limit, and less is better.
Jeff Richardson, a spokesperson for VantageScore, one of the two major credit-scoring companies, notes that keeping your balance under 30% suggests that your debt is not so high that it will be difficult to pay down.
The good news: Once you're able to whittle down your credit card balance, it will stop damaging your score.
How to keep balances low
Credit card issuers report your balance about once a month. The amount reported most often matches the amount on your monthly statement. You can pay your balance before the statement is issued, or pay online as often as you’d like. Regularly check your balance, or you may be able to set account alerts to be notified when your balance reaches a limit you choose.
Being added as an authorized user to a card with a large credit limit and low credit utilization can also help better your credit profile.
You do want to use some of your credit limit, though. Not using your credit card at all won’t demonstrate that you know how to repay it responsibly. And you run the risk that issuers may close your accounts for lack of use.
What else to know
If you routinely pay on time and use just a small part of your credit limits, you can expect to have a decent score. It really is that simple.
Scores consider other factors, too, but taken together, they make up roughly one-third of your score. They include:
Credit diversity. Scores reward having a mix of credit cards and loans with set terms and equal payments (though it’s possible to have a good score with just one type).
How often you apply for credit. Several credit applications close together can inflict temporary damage.
Length of credit history. Longer is better. Consider keeping credit cards open and using them lightly unless you have a compelling reason to close them.