My Credit Guide
What is a credit score and how is it determined?
Your Credit score is a numeric value that indicates the probability and willingness of a consumer to repay debt. The higher the score, the more likely the lender or creditor will be repaid on time and in full. Your score can range between 350 and 850. If your score falls in the 720’s or higher, your score is excellent, and you should not be limited within your financing options.
Payment History
About 35% of your score is based on your payment history, or whether or not you paid your accounts on time and made at least the minimum payment.
Amounts Owed
About 30% of your score is based on the overall amounts that you owe. Having revolving accounts with balances doesn’t make your score drop. However, if you have multiple accounts and those accounts are approaching the maximum credit limit, your score will likely drop. You do not want to have balances that exceed around 50% of the total available limit.
Length of Credit History
About 15% of your score is determined by how long you have had established credit. The longer you have shown the ability to manage your credit over time, the greater your score will be. However, even those with a relatively short credit history may have a high score, depending on the rest of the credit profile.
New Accounts
About 10% of your score is based on how many and what type of accounts you are applying for. For example, someone with a relatively short credit history who applies for multiple credit cards could represent a higher risk. Also, applying for credit will reflect a credit inquiry, which can cost up to 7-10 points of your score each time you apply for credit. These “inquiry hits” to your score generally fall off after 90 days from the date of the inquiry. However, you should be able to shop for the best rate and that should not affect your score as multiple inquiries. Find out more by speaking with our Mortgage Planners today.
Types of accounts being used
You score will reflect your overall types of credit accounts ranging from credit cards, consumer loans, and installment loans to mortgages. A good mix may increase your score, but having one of every type is not necessary. It’s generally a bad idea to open multiple accounts that you do not intend to use.
How to I improve and maintain my credit’s health?
Improving your overall credit
Familiarize yourself with the information being reported on your credit report. Once you find discrepancies or errors on your report, contact the creditor directly and discuss the issue with them. If it truly is an error, and they are not willing to help, contact the three major credit bureaus and dispute the account in question. This process takes about 45-60 days. The more documentation you have, the more effectively you’ll be able to get it resolved.
Pay your bills on time, every month, and do what it takes to live consistently within your means.
Avoid the use of credit cards. We’ve become a credit dependant society and studies have shown that is easier to spend money that we don’t have than if we had cash in our hands.
Do not close an account to get it off your credit. This often has a detrimental effect on your score. This could affect your overall percentage of available credit vs. debt owed. Remember that about 30% of your score is based in this ratio. You will want to maintain this ratio below 45%.
Pay down your debt as soon as possible. Don’t play the shuffle game of balance transfers. Moving debt from one account to another may report in the same month and count against you as twice what the actual debt is, effectively making you appear as a higher risk. Doing this often compounds the problem.
Speak with your creditors prior to them reporting you late. Many creditors have options that will postpone, or avoid derogatory reporting on your credit. If they are not aware of your situation, they will report the current status of your accounts. If you are having financial difficulties, a phone call can make a significant difference.
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