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The ability to open travel rewards-earning credit cards and take advantage of the many benefits that they offer requires that you maintain an excellent credit score. In addition to valuable points and miles that you can redeem for travel, these benefits include airport lounge access, travel insurance, and free or discounted companion airfares.
Even if you don't need or want to open a ton of credit cards, managing your credit score is still important in other parts of life such as renting or buying a home. There's a lot to know about managing your credit score and best practices to keep your score high. Here are our best tips to help you do just that.
The Importance of Managing Your Credit Score
The importance of maintaining a great credit score can't be overstated, especially when it comes to using credit cards to earn points and miles.
The first thing you should do when you're ready to start managing your credit score is to understand where you currently stand by getting a snapshot of your credit score. From there, you'll want to understand exactly what goes into calculating your credit score and what you can do to improve or maintain your score.
How To Check Your Credit Score Online
One popular way to check your credit score online is through myFICO, which provides you with your official FICO score from up to three credit bureaus. This is the same service that roughly 90% of lenders in the U.S. use to determine your creditworthiness. It's the easiest way to see the same data that lenders will be using to assess your credit card applications. In order to see your FICO score from all three credit bureaus, you'll need to sign up for membership starting at $19.95 per month.
The free version of myFICO, however, is an option for receiving not only your FICO score from Equifax but also your credit report. This version also includes credit monitoring and is a great option for getting a snapshot of your credit score.
Credit Sesame or Credit Karma
Companies like Credit Sesame or Credit Karma are completely free and allow you to retrieve your credit info. They also offer a wealth of information about what is affecting your credit score. Additionally, they provide tips and tricks to help raise your score. Credit Sesame and Credit Karma don't provide your FICO score, but rather your credit score based on the VantageScore model, an alternate credit scoring model based on all three credit bureaus. The FICO score is specific to each bureau.
We highly recommend signing up for a service like the ones mentioned above. Services like this provide additional tools and a broader picture of your financial situation with data from your credit reports.
Options available through your bank
Your bank where you have an account or a credit card may provide you with free credit services as well. A good example of this is Chase Credit Journey, which is available to Chase bank account holders and credit cardholders.
Your best bet is to monitor your credit through multiple sources or all of the sources listed here. That way you can see what possible variations in your credit score or report might be affecting your creditworthiness.
One helpful note: When getting ready to apply for a new credit card, check your score with the bank you're applying with if you already have another account with them. This ensures that you see exactly what the bank is taking into consideration for your application.
How Credit Scores Are Calculated
Credit scores are complex, compiled using your lending history and financial data. If your credit score is suffering, the first step to improving it is to understand what factors go into your score in the first place.
Here are the factors that are taken into account when determining your credit score:
- Payment history (35%): Lenders are looking for “on time, every time” customers. Late payments represent a higher risk, and anything over 30 days will start to impact your credit score.
- Amounts owed (30%): This number is not calculated on the raw sum of money owed. Instead, it's calculated based on your utilization rate, or the proportion of available credit to how much is being used. Lenders are looking for utilization rates under 30%, which will earn you a better credit score. Note: This doesn't mean you should carry a balance. Your utilization is reported every month, typically when your statement closes. It shows how much of your available credit you utilized in the past month.
- Length of credit history (15%): Calculating the average age of your credit accounts, this takes into account the length of time you’ve had accounts open. Further, it factors in how often accounts are used, plus the length of time that individual accounts have been open.
- New credit (10%): If you’ve opened multiple accounts recently, or made inquiries (known as hard pulls), this is where they show. Your credit score will traditionally dip when it shows several new accounts added in quick succession — especially if you don’t have a long credit history. Note: The impact of these inquiries starts to fade immediately. Over one year, those dips from inquiries are gone.
- Credit mix (10%): This takes into account your entire lending mix. This includes items such as credit cards, personal loans, finance accounts, and mortgages. It also includes external factors, such as being a guarantor or authorized user on another account.
Tips to Manage Your Credit Score
Always pay your account on time
The single most important factor in managing your credit score is paying your accounts on time. Never let your payments fall behind. You can even set up automatic payments each month or alerts to remind you to pay your credit card. Additionally, personal finance software like Mint or You Need A Budget, helps you to keep track of what's due (as well as other financial and budgeting organizing).
Keep credit utilization under 30%
Even better, aim for under 10%. Studies have shown that keeping credit utilization ratios under 10% gives you the best possible chance of achieving an 800+ score (considered “exceptional”). It's also worth noting that keeping the balances on your credit cards low can potentially save you thousands in interest over the lifetime of an account.
Downgrade rather than close accounts
Closing accounts can have a negative impact in two ways. First, you might have less available credit which might increase your credit utilization ratio. And second, it can affect the average age of your accounts, especially if you close one of your older accounts. Rather than cancel a credit card, look to downgrade to a card from the same provider that is a better fit for your current financial position.
Set regular times to assess your credit score
One of the worst things you can do for your credit score is to ignore it. Setting bi-monthly or quarterly dates to monitor and assess your credit score will help you manage it and make plans to raise it. You can stay on top of things that may be negatively impacting your score by catching them early during these check-ins. It’s also an excellent way to prevent fraud.
How to Fix Bad Credit
Fixing a bad or less-than-ideal credit score takes time to fix, above all else. Luckily, however, there are a few tips to help fix a credit score that needs a little TLC.
Make on-time payments
Even if it's just the minimum payment on a card that you can't pay in full each month, paying on your due date is very important. On-time payments and payment history are the largest factors that credit bureaus take into consideration when calculating your credit score.
Lower your credit card utilization ratio
This can be done in one of two ways. For the sake of paying less in interest fees that accumulate from carrying a balance each month, you can pay down your credit cards. Or, you can request a credit increase on the cards you already have. By increasing the credit available to you, the bureaus see you as having more credit than you have debt.
At best, your credit score may jump a few points after you've made a large dent in any debt, but it will take time for creditors to increase your creditworthiness just from a low balance. Credit bureaus like to see a habit of on-time payments as well as a longer credit history meaning accounts that have been open and in good standing for a while. The only way to have either of these things is time.
Correct management of your credit score is one of the most important factors in a successful rewards travel plan. It gives you the highest possible chance of being approved for the best credit cards with the best perks as well as the lowest interest rates. This could potentially save you thousands of dollars in interest over the life of each credit account.
We highly recommend that your first step be to set up an account with a service like Credit Karma to monitor your credit scores and create a plan to get your score as high as you can. You’ll find a good credit plan gives you the best possible chance of success when taking on rewards travel as a hobby.
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