Credit: The Game You Didn’t Know You Were Playing
As a mortgage officer I get a lot of questions about credit scores, commonalty known as FICO’s. These all important scores affect so much in your life. Everything from how much you pay for your mortgage to what you pay for insurance and even whether or not you get the job you applied for.
With something having such a big impact on your life, it is important to know what makes your score go up and what makes it go down as well as what goes into your score and what does not.
Let’s start with what factors goes into your credit score. According to WhatsMyScore.org 35% of your score is determined by making your payments on time. By that I mean FICO definition of on time, not necessarily yours or mine. I had a first time home buyer tell me she could not qualify because she didn’t always pay her bills on time. I asked her what she meant by that and she told me sometimes the bills were due on the first and she didn’t pay them until the 8 or 9th. On time means your bill must be to the creditor within 30 days of the bill date. The creditor may charge you a fee if you are over a shorter period of time such as 15 days for most mortgages but that doesn’t mean it is a 30 day late on your mortgage.
30% of your score is based on your credit limits to your credit balances. Remember that old adage “We only lend money to people that don’t need it”? Will that saying is still true in today’s world. Ideally, to build the maximum credit score possible you would maintain a balance between 5 and 30% of your revolving credit limits. Paying down your installment loans faster than the amortization schedule should also help boost your score. People who like to pay their balance off each month are often surprised that their scores are not higher or there is a balance showing on their report. What matters is that your balance is between 5 and 30% on the day that your credit is pulled. You can make that happen by just never exceeding 30% of your credit limit.
To paraphrase the commercial says “What you carry in your wallet does matter!” There are four types of credit on your report. Retail cards such as Macys, Sears, or other retail outlets. Finance companies such as Visa, Mastercard and American Express, though American Express can also be a “30 Day” Card, requiring payment in full every 30 Days. Finally, there are installment loans and mortgages. Your score increases when you have a good mixture of these loans. While it is true that each creditor looks at the payment history of their type of loan, ie., car lenders look at how you paid your car loan and credit card creditors look at how you pay your credit cards 15% of your overall score is affected by the mixture of accounts.
Don’t Close that account or your score will go down! By now most people know that closing old accounts can lower your FICO score but don’t know the reason why. While 10% of your score is determined by the age of your accounts, this is why your parents normally have a better score than you, the big hit can come not from closing the account but by upsetting your credit limits to your outstanding balances. (Remember, that’s 30% of your score).
Last but not least, 10% of your score can be affected by new accounts. New accounts are a potential red flag when it comes to estimating risk. After all, that what FICO is really doing, trying to estimate the risk of you not paying back the money you have borrowed. A new account is risker because it has no payment history.
People, in a effort to raise their score will get a new credit card. Unfortunately, many also max it out in less than 90 days. Let’s think about what this does. If 30% of your score is limits to balances then we know that maxing out a card is bad. Another thing to factor in is the type of card you received. Was it a Visa, good to use everywhere or was it a card to a local store, only good at that store. Since credit mix affects your score by 15%, the type of card will have a impact on your score. Finally we take into consideration the age of the account both as a new card and having no history. (Verses a account that may be 5 years old that you are only now using). This accounts for 10% of your score. That means your new account can impact 4 out of the 5 factors affecting your score without you even of making more than a couple of payments!
So if you are going to play the credit game it is critical that you understand the rules and how the score card is graded. With the impact of your score affecting so many areas of your life, the credit game is a game you should play to win!.
by David Rider