How timely you pay your bills, and how you handle credit, go into calculating your credit score.
Your credit score is used to determine your ability to handle financing, like a mortgage or car loan.
There are five components, weighted by percentage, to calculating a consumer's credit score: Payment history, 35 percent; low balances, 30 percent; age of credit history, 15 percent; new credit, 10 percent; and types of credit in use, 10 percent, according to Terri Stocki, certified education director for Consumer Credit Counseling Service of Northeastern Pennsylvania.
"Pay your bills on time, because 35 percent of your credit score is based on your payment history," Ms. Stocki said. "So the best way to build and maintain good credit is to pay your bills on time. If you have missed payments, get current and stay current."
Like Ms. Stocki, Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling, recommends paying bills on time.
"That sounds easy enough, but when money is tight, it can be quite a challenge," Ms. Cunningham said. "Nonetheless, this is the highest weighted element of the credit scoring model, so paying bills on time is key to improving the score. If you travel for work, are unorganized or are a procrastinator, set up automatic bill pay so that at least the minimum due is met. You can always circle back and pay the balance, but this will keep you from paying late which results in a negative mark on your credit report and a lowered credit score."
When you use credit, keep balances low on your credit cards, and don't move debt between credit cards, Ms. Stocki said.
"We usually say to try to keep your balances below 30 percent of your credit limit," Ms. Stocki said. "A 0 percent interest rate for 12 months might sound attractive, however one question you want to ask yourself is, 'Will I have this whole amount that I'm transferring to this new card paid off within the 12-month period? The honest answer is, 'Probably not.' "
The consumer unknowingly hurts his or her credit score in two ways, Ms. Stocki said.
"Every time you open a new credit card, it reduces your credit score," Ms. Stocki said. "Now if you close out that old account from where you transferred the balance, that is also hurting your credit score because if you had a good payment history with that credit card company you are basically erasing that good payment history. And besides, the lower interest rate may seem attractive, but there is still usually a balance transfer fee. Apply for and open new credit only when you need it, and check your credit report regularly."
Ms. Cunningham also recommends not using more than 30 percent of your credit limit and not to close out cards you no longer use.
"Let's say you had an overall $10,000 line of credit and owed $3,000," Ms. Cunningham said. "You were in pretty good shape to streamline things, you closed one card which had a $2,000 credit line. Your overall line is now $8,000, but you still owe the $3,000. You just raised your credit utilization ratio to above 30 percent without spending a dime."
There are three other elements to a credit score - inquiries, mix of credit and longevity - but they weigh less in the formula.
"If you can only do two things right - pay your bills on time and do not charge more than 30 percent of your credit line - you'll likely increase your score, as these two things represent 65 percent of the score," Ms. Cunningham said.
Not enough people check their credit report at AnnualCreditReport.com, she said.
"The NFCC's annual financial literacy survey revealed that 62 percent had not done so," Ms. Cunningham said. "People should review their credit report for accuracy and dispute any errors."
Donald Galade, of Galade Financial, Drums, said it is important for people to know what is in their credit report.
"I've found through my financial counseling and planning, many people do not know how to read their credit report, or get a copy of it," Mr. Galade said. "I caution people where they get a supposedly free credit report."
Mr. Galade also cautions people to be careful how they handle credit and their credit cards to protect themselves against identify theft.
There is a website that provides "a truly free" credit report, said Chris Falvello, a financial analyst with Navigate Financial Advisors, Conyngham.
"CreditKarma.com is an awesome site with tools to help you manage your credit," Mr. Falvello said. "It has a home affordability calculator, a debt recalculator, and credit card interest rate trends. My favorite is the credit score simulator that lets you simulate that effect of financial transactions on your credit score. Also there are great articles to help you manage and improve your credit."
Chad Grossman, a spokesman for freecreditscore.com, said its website also has information and a score simulator, called a Score Planner.
"Our website has a bunch of credit articles that touch on ways credit is taken into account during different life events," Mr. Grossman said.
"How do these events impact your own personal credit report? You can actually measure it with the Score Planner on the site," he said.
Contact the writer: jdino@standardspeaker.com