Improve your credit score

Sign reading credit score excellent, good, fair, poor

The general purpose of a credit score is to show how likely you are to pay back a loan, which is why a good track record is important. Knowing the components that make up a credit score is one thing, but actually understanding the specific activities that impact each component is one great way you'll improve your score. Here are a few steps to help you boost your credit rating.

Payment history: 35 percent

Your score factors in your payment history on current/past accounts and any public record and collection items. A few late payments won't demolish your score, but your credit will drop significantly if it's a regular problem. As for public record and collection items, this refers to bankruptcies, foreclosures, lawsuits, etc. These events are more serious and can create quite a drop in your score.

SCORE BOOSTER: Enroll in automatic withdrawal to ensure timely bill payments.

Amounts owed: 30 percent

Your credit score looks at your overall debt and credit use, which is the ratio of your credit balance to your credit limit. If your balance is $250 and your limit is $1,000, your ratio is 25 percent. Experts suggest keeping it below 30 percent. Keep in mind your score considers both the credit utilization rate for each account separately and the rate of all cards combined.

SCORE BOOSTER: Keep your credit balances consistently below 30 percent.

Length of credit history: 15 percent

Your credit score considers how long your accounts have been open and how long since your accounts have had activity. This can be tough when age and experience come into play. It takes at least six months to generate a credit score, so waiting to build credit can be a problem. Additionally, your score calculates the age of your oldest account, newest account, and the average age of all accounts, which is why it actually hurts your score to close old credit cards.

SCORE BOOSTER: Don't close your credit cards (especially your oldest one).

New credit: 10 percent

Opening multiple accounts in a short span of time represents greater risk. This can be difficult for young people, since they already have less credit history because of their age; and they're in the market for auto loans, higher credit limits, and mortgages. Either way, it's important to be strategic when shopping for a new loan or credit card because you don't want your report to show that you're constantly looking for credit.

Another major offender are retail cards. The additional 20 percent off might sound tempting, but it's not worth it when multiple new accounts actually lower your credit score. Retail cards themselves are okay, but just open them in moderation.

SCORE BOOSTER: Avoid opening multiple accounts around the same time.

Credit mix: 10 percent

Your credit score considers the different types of accounts you have: credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. Ideally you want to have a mix of revolving and installment credit to show that you can handle both. Revolving credit is credit that does not have a fixed number of payments, like a credit card, whereas installment credit, such as an auto loan, does.

SCORE BOOSTER: Make sure you have different types of credit accounts.

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