This is basically a continuation of what we were talking about yesterday, that is, managing your debt and credit. Managing a great credit score entails a lot of financial discipline on the part of the borrower. As I said yesterday, the days of buying a house or a car for cash are long gone, and this means walking into a financial institution and requesting for financing. And this is where you credit score comes into play, and your credit information is scrutinized for the last ten years by the lender, before they decide whether they are going to do business with you! As you go about your business, it is advisable that you get a glimpse of the kind of information that makes or breaks the deal for you. Ray Martin explains in the following article some of the areas that are critical to your credit score.
Earlier this week I answered a reader’s question on steps to take to improve her credit score. But what about folks who don’t want to just to improve their credit score, but want to get it to the highest possible range? Before you make a move, you first need to know the most important information used from your credit report in determining your score. Check out MyFico.com for more detail on what make up your credit score.
Here are the two things that account for two-thirds of your credit score:
- Your Payment History: Having a long history of making payments on time on all types of credit accounts is one of the most important items lenders consider before approving you for a loan.
- Owed versus Available Credit: This compares the amount you owe versus the total amount of credit available. Your credit score can be lower when you use more than 50 percent of your available credit for each account. That’s because when you are close to maxing out on all of your credit limits, lenders see you as a higher risk and more likely to make late payments in the near future.
There are three other factors that account for about a third of your credit score:
- Length of Credit History: In general, a credit report containing a list of accounts opened for at least ten years or more will help your credit score. The score considers your oldest active account and the average age of all accounts.
- New Credit: Opening several new credit accounts in a short period of time can lower your credit score. Also multiple credit report inquiries may be seen as risky credit behavior on the near horizon, and can therefore lower your credit score. But “soft credit inquiries”, which include requests made by you, an employer or by a lender who “pre-screens” or “pre-approves”, have little or no impact. Also, multiple inquiries by automobile and mortgage lenders over a 30-day period count as just one inquiry, so shopping the lenders to get the best rate should not hurt your score.
- Type of Credit You Use: Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered.
Your credit score ignores your age, salary and occupation. It also does not take into account financial gifts, support you receive, or your financial assets. For this reason, credit scores are less important for borrowers who seek loans that take these factors into account.
If you want to take action to increase your credit score, then take a look at folks with the highest credit scores. About 13 percent of folks have credit scores of 800 or higher. If you look at their credit profile, they have:
- Four to six credit card accounts,
- No late payments in the past seven years,
- A least one installment loan — a mortgage or a car loan — with excellent payment history,
- An average of 10 years credit history per account and a few accounts with 20 years of good history,
- A low number of credit inquiries (fewer than three in the past six months),
- No bankruptcies, foreclosures, charge-offs or collections, and
- Debt levels at no more than 35 percent of their overall credit limits per account.
The Bottom Line: Having a long history of making all payments on time, using the right mix of credit, and not maxing out on available credit are the keys to a having a great credit score.