Credit Scores, part 2
Last post we started discussing what makes up your credit score, and noted there were five factors. The first two, Payment History and Credit Utilization make up the largest portion, 65%. But the other three are also important, claiming 210 of the 600 available points.
- Length of Credit History (15%)
Time is an important factor in building our credit. Your overall score takes into account how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts. The greater the length of experience, the better for you because it shows a longer period of responsibility. This is another reason why, as mentioned last week, you shouldn’t cancel old accounts, as they will stretch out your history and thus push your score higher.
The score also takes into account how long specific accounts have been established, especially revolving accounts (credit cards). These are the ones that most reflect your discipline with payments, as many others have fixed schedules and direct payments that don’t reflect as much on your personal character.
Another factor is how long it’s been since you used specific accounts. If they are simply dormant, they don’t say much about you so any positive effect will wane over time. So, even if you no longer need a credit card, use it a little from time to time, to keep it from appearing suspect and its positive effect from diminishing.
Of course, the negative notations on your account that pull down your score, such as payment delinquencies, collections and bankruptcies, maintain a negative pull until they fall off your record, but the negative drag also diminishes over time.
Here’s a tip: if you’re paying off your credit card in full every month (a good idea), don’t do it before your monthly statement arrives. Let the creditor report it first, but then pay several days before due date. If you pay before it’s reported, showing a continuous “0” balance, the card may appear dormant and have a less positive effect.
- Types of Credit (10%)
This is not a large factor, but a good mix of revolving accounts, installment accounts, retail accounts, even mortgage accounts and cellular phone accounts can help you, especially if the other information in your file is thin. This shows whether or not you have a wide range of experience with credit. The more experience, the more likely you’ll be knowledgeable about, and responsible with, your credit.
We’ve already mentioned that some types of credit are weighted more heavily than others. Revolving credit carries the most weight because it best reflects your discipline with making payments, compared to those that are on fixed payment schedules (installment payments like vehicle loans and retail loans).
For this reason, it is virtually impossible to get a mortgage without having a credit card. An accumulation of other credit lines may be sufficient, depending on the lender, but it’s best not to gamble on this. The best advice: If you ever want to get a mortgage, get a credit card ASAP.
- New Credit (10%)
Your credit report takes into account what it sees as “shopping for credit.” People tend to open new accounts when they are experiencing cash flow problems or planning to take on lots of new debt. So, if you’ve opened several new accounts recently, you could be seen as a greater credit risk.
The bureaus track every time a lender checks your credit score, and each “hit” will cost you–up to six points on your score. Sometimes, they will consider multiple hits in quick succession as single hits because they assume that you are simply shopping for the best deal, not multiple credit lines. But one should still be cautious about getting too many hits, regardless of the reason.
Credit checks stay on your report for three years, but usually only the last year’s hits are considered in calculating your score.
In sum, this factor is made up of how many new accounts you have, how many total credit inquiries on your report (at least in the last year), the length of time since credit inquiries were made, how long it’s been since you opened a new account, and whether your recent credit history is good, showing that you’ve bounced back from past payment problems.
Finally, everyone should keep track of their own credit score and report because errors can, and do, occur. You would be surprised how many people are refused a mortgage or other loan simply because there was an error on their report that brought their score down. If there is an error, you have the right to get it corrected, and there is a process for doing so.
But, you may be thinking, if I check my score, will it not damage my score? The answer is No. There are “hard hits,” the ones a potential lender makes, and “soft hits,” the ones you make. It is only the hard hits that affect your score. In fact, when lenders check your scores, they aren’t even shown the soft hits. So, you can “soft hit” your score and report as many times as you want without affecting your score.
Your credit score is one of the most valuable things you possess if you want to get ahead financially in life. So you should guard it: 1. Check it often to keep on top of it; 2. Keep it up-to-date by reporting any errors, changes of address, changes of employment and, especially, change of name; and 3. Secure it from identity theft by providing accurate information when getting credit and by protecting your accounts with good passwords.
