Ever Wonder Why Credit Scores Run the World?
Why is so much importance placed on a little number that can dictate your livelihood? We're here to tell you that we've wondered the same thing but we also understand there's nothing we can do to change the system.
So. If you can't beat 'em, outsmart 'em! Learning about credit, and specifically about our own credit scores, shouldn't be avoided like the dentist or a smelly garbage dump.
It should be acknowledged, embraced, and then mastered.
FICO (Fair Isaac Corporation) Credit Scores
Most commonly used by Lenders who qualify loan applicants. They are weighted by 5 factors. When all factors are combined, a 3-digit score is assigned in the range between 300-850. We will spend our time on the 5 Factors of Credit Analysis.
Factors of Credit Analysis
Payment History - 35%
How and when you pay your bills are all recorded. They have been watching how you pay your cable bill, your car payments, your student loans, your rent/mortgage. Everything. They can even see if you were 30, 60, 90, 120 (or more) days late on a payment and whether you paid in full.
Creepy to say the least.
Since this area is weighted the most, best to start here when looking to improve your score.
- PAY ALL BILLS ON TIME (In FULL if you can)
- Set Automatic Withdrawals
- Pay On-line
- Set Calendar Reminders
- Don't Carry Balances
- Don't Borrow More Than You Can Pay Back
Accounts Owed - 30%
How much do you owe compared to your available credit? Having debt isn't necessarily a bad thing, so long as you are not maxed out. Let me introduce you to Brad and Angelina. Brad has a credit card limit of $10,000 whereas Angelina has a credit card limit of $50,000. Both owe the same amount - $10,000.
Who has the better credit?
If you said Angelina, you'd be correct. Her debt to credit ratio is 20%. Brad's is 100%. This goes without saying, but.... the lower your ratio, the better.
- Keep your Debt to Credit Ratio Low (30% or below if possible)
- Apply for Higher Credit Limits (Helps the ratio)
- Spend Less
- Pay more than your monthly minimums (if possible)
Credit History - 15%
How Long you've been Playing the Game.
Generally, the longer a person's history of credit, the better their score.
This is because you've proved over a longer period of time that you are a responsible user of credit and you therefore are more trustworthy.
- Don't close long standing accounts (unless a professional tells you otherwise)
- Don't cut up credit cards before consulting with a professional
- If you are paying fees on a card, ask the company to switch you to a different type of card under the same account number (preserving your history)
- Remember, building credit takes time. Don't get discouraged with this one.
New Credit - 10%
Your New Accounts
Opening several new accounts in a short period of time is a red flag on your credit report. It indicates risk and lowers your score. If you're looking to buy a home in a year or more, now is the time to open an account if needed.
- Avoid opening new accounts in a short period of time
- Limit credit inquiries
- Don't change your credit between getting approved for a loan and closing
Credit Mix - 10%
The Types of Credit you have.
Credit mix is having a variety of credit accounts. Having a robust mix of retail accounts, credit cards, installment loans (mortgage, vehicle, student loans) generally improves your credit.
Having a variety of healthy accounts communicates that you are responsible and knowledgeable of more than one type of credit account. This diversity will help when getting favorable terms on a loan.
- Be sure to read all terms and conditions before opening an account
- Check for hidden fees like a monthly service fee
- Research Credit Reward options
There you have it.
You are now fully equipped. You have the key to the test. Only you can change your credit. Take it a day at a time and consider consulting a financial advisor/professional to help you strategize!