For many of us, having good credit is a journey. We may have encountered trouble in the beginning of our credit history that caused setbacks. Others got it right straight out of the gates, but ran into trouble when faced with job loss, divorce, medical issues or problems budgeting. However we ended up with less than perfect credit, our goal is to improve our credit to the point we qualify for the best rates on home loans, auto loans, furniture, credit cards and more.
On a credit score scale of 300 – 850, this would be in the range of 740 or higher. Most of us have learned by now that the five categories that comprise a FICO score are: payment history, account balances, length of credit history, types of accounts and inquiries on the credit report.
When you look at the anatomy of a credit score, the most weight is given to our payment history. A great credit score will have either zero or a (very) few, old late payment notations. It will also be free of collection accounts.
The second important section is how much credit you are using. We often hear people say that you should use less than 20% to 30% of your available credit limit in order to have good credit. People with excellent credit typically use less than 10% of the limit.
When it comes to credit scores, another factor is how long you have had your credit accounts. According to FICO, the most important age factors are:
This is why it matters if you close an old credit card account. It also matters if you open new accounts as it can lower the average age.
To keep accounts relevant to your credit score, you have to use them. The accounts that weigh most heavily have been used within the past 24 months. Hopefully they are continuing to be used. At American Financial Solutions, we will often suggest that someone use their credit card account to pay a normal monthly bill. They already set that money aside each month, so instead of paying the bill directly, they use the funds to pay the credit card charge that paid that service. If you are worried that paying your credit card account off in full will work against you – it won’t. The credit card company does not wait for you to pay an account off before they report to the credit reporting agencies. The balance at the time the account is reported will be the balance that shows on your account.
The two final segments of the credit score are the number of accounts you are trying to open and the types of credit you are using. People with excellent credit have few inquiries on their credit reports. They also use different types of credit accounts, but they include a minimum of two credit cards.
Having a high credit score takes work, discipline and time. If you add positive information the scores will improve. Be diligent about making payments on time and keeping balances low. These two things have the most impact on your score. You can also speak to a credit counselor who can help you decide the best steps to take to manage your credit. Contact one today at 888-864-8659 or visit us online at www.myfinancialgoals.org.