Let’s face it, credit is confusing. Understanding all of the variables can take years of studying algorithms and knowing what variables come into play and when. Lucky for you, it’s Monday, and I am in a studious mood. Because of that, I thought it wise to share with you some of the most important variables with respect to understanding what drives your credit score.
First and foremost is payment history. This section of the model accounts for roughly 35% of our credit scores and this is where all of the good, the bad and the ugly hang out. All of your positive monthly payments are tracked within this section in addition to the negative pieces of information such as collections, late payments, judgments, etc. Make sure you are making your payments on time for the healthiest mixture of payment history.
Revolving accounts or credit cards and the responsible usage of them makes up for 30% of our credit scores. Keep in mind that all cards are created equal. What I mean by this is, just like how an employer cannot discriminate when you apply for employment, the algorithms used to calculate your scores cannot discriminate against the wealthy. This is why each credit card is weighed the same. So, if you have one credit card, that makes up the full 30% of this section, two cards would yield 15% for each card and so on and so forth. How much a card can help or hinder you is all based upon its utilization and that magic number is less than 30% of your credit limit.
Coming in third at a whopping 15% of your credit score is length of credit history. This is pretty simple as this section is just an average of all of your open and active accounts. There are several tips and tricks with respect to maximizing this section, but we will save that for another studious Monday my friends.
Types of credit makes up for 10% of your credit score and this section is basically looking for a solid blend of different types of accounts. In a perfect world, you would have a mortgage, a credit card, a student loan, a credit card and a no limit Amex. Does this mean if you have three credit cards you need three mortgages? No, the algorithm is basically looking for a solid blend of at least one of each type of account.
Finally we come to new credit. This section is comprised of two parts, new accounts and inquiries. Any time you open a new account, regardless of its type, your score will suffer initially. The algorithms are basically assessing if you can sustain and warrant the debt you just took on before you are handed more. Makes sense right? This probationary window typically lasts for roughly 90 days and if ample due diligence was applied, you recapture the points and grow from there. Inquires also affect your score. Anytime you apply for any type of credit, an inquiry is paired with your credit report causing a small decrease in the scores; typically 2-5 points each.
Understanding these variables is just the beginning of the journey to better credit. Give us a call today for a free consultation and learn how you can have better credit!