The first step to improving your credit score is to understand why you have that score in the first place.
Your credit score is a three-digit number between 300 and 850 that shows how well you’ve paid your bills in the past and the likelihood of how you will pay your bills in the future. According to Experian, a score between 300-579 is considered very poor, 580-669 is fair, 670-739 is good, 740-799 is very good, and a score above 800 is exceptional. On average only 20% are thought to have an exceptional credit score.
There are five components to calculating a credit score:
• Payment history for revolving credit and installment accounts make up 35% of your score.
• Total amount owed on all credit accounts counts for 30% of your score.
• Length of credit history is 15% of your score. Lenders feel that someone with a long history of on-time payments is a safer bet than someone with a short-term credit history.
• New credit accounts count as 10% of your score. Beware of overextending limits or applying for new credit often as it can indicate your under financial pressure.
• FICO looks at the mix of all credit types, including auto loans, credit cards, mortgage loans and much more to make up 10% of your score.
The scoring models used today are Equifax Beacon 5.0, TransUnion Classic 98 or 04 and Experian FICO. Credit scores provided directly to you are not the same model as used in Mortgage Lending and scores can vary up or down from a mortgage lenders tri-merge credit report.
Some misunderstood components of credit scoring include revolving accounts and credit inquiries. Revolving credit has more of an impact on your score because it offers more “financial clues” into your behavior than installment loans do. With installment loans you either make the payment or you don’t. With revolving credit there are lots of decisions that you can make – charge a little and pay the minimum, max it out and pay it off entirely, or don’t use it at all. How you manage your variable debt tells lenders a lot about how you’ll manage debt you don’t have yet. The best way to raise your score with revolving debt is to keep your credit card balances below 40% of your maximum limit and to pay the balances in full quickly.
FICO scores ignore all mortgage and auto inquiries in the previous 30 days. Thereafter, multiple auto or mortgage inquiries in any 45-day period count as just one inquiry. Checking your own credit report, requests for pre-screenings, inquiries from an existing creditor and employment inquiries are called Soft Inquiries. These inquiries do not affect your score at all.
The single most damaging item to your score is currently past due trade lines. All accounts need to be paid every month, on time, to avoid a drastic reduction in your credit score.
To learn more on credit scoring or obtain a free copy of your credit report, give me a call at 704-608-0916. If you are seeking a home loan to purchase or refinance, please complete the Quick Quote form.