Keeping track of your credit score and understanding how it’s basically calculated can help you build a good score and maintain it. I recently attended a class with a lender and got some great information about credit scores. Here are my notes:
Credit Scores are made up of 5 sub-scores, which all need to be kept in good shape over time:
1. Payment History …………..35% Bills should be paid as agreed the most recent 6 months. The highest weight is put on the highest payments, mortgage, car payments, etc.
2. Balances Carried …………..30% Keep your balance to a ratio as low as possible. Outstanding balances should be less than 30% of the available credit. Over 50% is not so good. For example, if you have a credit card with a $3,000 limit, you shouldn’t have more than a $1,000 balance. Spread the balances between cards, don’t have all the balance on one card with the others at zero.
3. Credit History ………………15% The longer the credit history the better. Long credit history paid, as agreed has a positive impact on your credit score. So don’t close old accounts, especially if they have a long history, that has a negative impact on credit score.
4. Mix Of Accounts ……………10% It is ideal to have installment and revolving accounts. Mortgage loan, auto loan, 3 to 5 credit cards (more is ok, too), paid on time over 1 to 2 years. A HELOC should be greater than $40,000 or it will report as a revolving account versus a mortgage. (You don’t have to have them all at once, however. A mix of credit accounts over the years is ideal)
5. Inquiries ……………………..10% If you are applying for a mortgage, you are allowed a number of credit inquiries for 14 days, after that inquiries can cause you to lose points. Be aware that constantly applying for credit will cause a lower score. You are allowed to pull 1 credit report each year for your own knowledge, which is a good idea to keep aware of what is going on with your credit score.
Inquiries that don’t hurt the score: Job related, insurance/utilities, account review, personal (www.annualcreditreport.com) and pre-approved offers in the mail.
Blemished credit can be costly, low credit scores mean higher interest rates. What can you do?
1. Check your own credit score. Mistakes are made, and finding them can save you. Everyone has the right by law to challenge mistakes on their credit report. Keeping track of your credit score is important to catch mistakes.
2. Pay past due accounts. Past due accounts can include those that are 1 day late. Past due accounts do not include judgements and collection accounts.
3. Get rid of late payments. Have them removed by phoning your creditor and requesting late payments be removed. You must be persistent and work your way up the ladder to someone who can help you. Always get a letter that documents: Name/address/account number, specific late payment to be removed, on company letterhead/signed by employee.
4. Get your credit card balances down, try getting credit limits increased. Every 6 months request an increase to your credit limit. Have the creditor base the increase on your credit history. However, if the creditor must pull credit, don’t, it will lower your credit score.
5. Start or keep making payments on time.
6. Do not close old accounts, this will hurt your score. Use old accounts periodically, charge a small amount and pay it off immediately. Don’t reply to pre-approved offers. Don’t consolidate.
7. Consider using the services of a professional credit counselor if you need extra help improving your credit score. We know just the person to help!
If you wonder if it’s worth the trouble, think about this: Increasing your credit score by 10 points will net interest savings of $100,000 over 30 years (on a $500,000 mortgage loan.)
It’s worth the trouble! Check out this table showing the impact of interest rates on your monthly payment
Chris & Karen Highland
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