Do you know the two biggest factors in having good credit?
Paying debts on time is No. 1, and credit utilization is No. 2.
Paying your debts on time, just the minimum monthly payment, makes up 35% of your credit score. And the best way to pay on time is to put your bills on autopay. Almost all my bills, including my mortgage, are drafted out of my bank account monthly. I just need to put two more on autopay.
Credit utilization makes up 30% of your credit score. It measures how much of credit are you using compared to how much is available to you. Most loan officers want to see you using only 20-30% of your available credit lines. So for instance, if you have charged up $2,000 on five cards with combined limits of $5,000, your credit utilization is 40%. So you should pay down your cards to get the total balances down to $1,000, to put you at a comfortable 20%.
Here are two more nuggets for building good credit. Credit utilization only deals with credit cards. So owing a lot in student loans and car loans doesn’t affect your credit utilization, but you should be current because it affects your paying on time analysis, which again makes up most of your credit score. My company has a student loan forgiveness and debt elimination program if you need guidance.
Also if you want a really good credit score, your credit card usage should be around 1-10%, preferably 1%. So it is wise to not use your cards unless you can quickly pay off the balances every month to avoid paying interest and to keep your credit utilization low. In other words, your credit cards should not be your emergency fund. You should actually have a savings account with a minimum of 3 months living expenses because if you use credit when you are in a financial jam, you likely won’t be able to pay them off quickly, which increases your credit utilization and may damage your paying on time if you can’t afford to make the minimum payments.