5 Major Factors that Affect your Credit Score
By Sam Kapur, Co-Founder of Guyding Principals.
With all the recent news about the credit reporting agency, Experian, I felt it was appropriate to write a post about credit. While working in-car sales for 8 years I was able to see first hand how credit worthiness effected people. Also, I was made aware of how little people actually knew about the entire process of the credit system. Here are the major factors that determine your credit score.
Types of Credit
Some of the different categories include, revolving debt (credit cards), installment debt (car loans), and mortgages. When building your credit it is useful to try to have accounts in all categories, but as this is the smallest component of your overall calculation don’t go buying a house you can’t afford just to increase your score. As a rule of thumb, you should try to keep at least 3 credit cards open.
Length of Credit History
There are two things to look at here. What is the average length of all the accounts that you have and what is the oldest account on your credit. My advice to you is not to close those credit cards that you applied for in college even if you are no longer going to use them.
There are two major types of inquires, hard and soft (yes, we are still talking about credit). Soft hits are when you are checking your own score or when one of your existing credit providers are checking your credit. Soft hits don’t have an effect on your score.
Hard hits on the other hand can significantly affect your score. One thing that’s changed in the past few years though is when buying a car or getting a mortgage. Before your score was effected every time a car dealer or mortgage company ran your credit. Typically though people like to rate shop so the have multiple institutions run their credit before making a purchase. Because of this any inquiries made within 14 to 45 days for the same type of credit will only effect your score once. It will also take 30 days before you score is effected.
This is one of the major factors effecting your score, but people usually assume that the more debt you have the lower your score will be. This isn’t necessarily true, for example, if you have $50k in debt, but are making your payments in time every month and have been doing so for the past 3 years, this will actually have a positive effect on your score.
The more important factor to look at here is your ratio of debt to available credit. So if you have $100k of available credit and have used $50k this would be better than having $20k in available credit and using $15k. The biggest mistake people make is closing a credit card once they have paid it off. Instead, I recommend tearing up the card so you don’t get tempted to use it, but keep the account open.
Another thing you can do to help this ratio is asking for a credit line increase on your current cards. Usually you can do this about once every 1 to 3 years per card. Also, this normally doesn’t count as an inquiry as it is usually a soft hit
This is by far the most important factor effecting your score. Creditors report 30, 60, and 90 day late payments to the credit agencies and also when you account goes into collection or is written off. Even 1 late payment can have a devastating effect on your score. I have seen people who have 90 day late payments for amounts under $5. This is ridiculous and shows a lack of responsibility to the creditor. The dollar amount that is late is less important than the amount of time you are late for. So make your payments in time. Although you have a 30 grace period for being late before your score is effected. Check your credit agreement on what the default rate is and the grace period before the default rate is applied. Some cards have no grace period which means your introductory rate of 2.9% can jump to 29.99% if you are just 1 day late.
If you have made mistakes in the past on your credit, don’t worry. There are credit repair agencies out there that can help remove some of the derogatory information, but there is no guarantee that they can make the change so if they tell you that they can 100% remove your bankruptcy in 6 months don’t believe them.
With all the credit fraud out there and just for your own piece of mind I recommend getting a credit monitoring service. Most credit cards offer this for a monthly charge and it is well worth it.
Let us know what questions you have about your credit.