AND THEN THERE WERE 2
Two what? Okay, Okay…there are really 5 Factors that determine your credit score. Last week we talked about 3 of them and the Top 3 things you can do right now. This week we will focus on the other 2. So they may not be weighted as heavily as the first 3, however, that doesn’t mean they should be overlooked. They too count and need Action Items built with them in consideration.
Many of my clients have suffered horrific financial pain and in doing so have lost sight that rebuilding their credit takes immediate and conscious effort. I am here to help and if nothing more…lay out the step-by-step action plan for recovery.
For just a moment, let’s back up and talk about the meaning or “weighted”. What does that mean exactly? In practical terms, it means the amount of precedence it takes. Again, what does that mean? Think of it as a priority list. With a priority list you tend to tackle the items that take top priority and in most cases it is because those items give you the most impact. I know for me and my priority list for housework, it starts with dirty dishes followed by clean counters and things being put away. Does that mean that I don’t vacuum and dust? Actually, my husband vacuums but the answer is NO…it just means that when someone enters my house the first thing they notice is it is picked up (except for my dogs toys) and visually appealing because that gives them the most impact. In this case with CREDIT, the weighting system means that the items with the highest percentage of weight are the items we want to focus on most as we will get the biggest bang for our effort. The good news is that everything we do counts and builds upon the total goal.
Enough of the details…give it to me straight!
The 4th and 5th factors are “Length of Credit” and “Types of Credit”.
Length of Credit:
Approximately 15% of your credit score is calculated by the length of your credit history. Using your credit cards as an example, which are considered “revolving credit”, the credit bureaus will go back to your oldest maintained account. Understand that your credit scores are based on past activities and that the longer you maintain an active account (or an account in general) the more HISTORY that you obtain. It’s not good enough to just HAVE them though. They also monitor their usage or last activity. Although not weighted as high as the first 3 we talked about last week, it may be the hardest to control as it is all based on TIME. What is the magic number? Maintaining credit for 2 years or more is the goal.
This is so important when taking action on cleaning up credit because very often we are lead to believe that we need to close out accounts in order to clean them up. Be careful! This is where Knowledge is Power since if you close out your eldest account…you are altering your credit score in a negative manner. At Financial Education Services (FES), we have a whole section on credit education. It is definitely worth the time to educate yourself when it comes to credit.
Types of Credit:
**10% of your credit score is derived from the type of credit you have on your credit report. What does that mean exactly? Contrary to popular belief, it does not mean that you should have an Amex, Visa, MasterCard, and Discover Card. Instead it means that you should have different types of credit lines open to improve or maximize your credit score.
For example, a good mix of credit should include:
A Car Loan
A Couple of Major Credit Cards like Amex or Visa
One or Two Department Store or Gas Credit Cards
If you don’t have a loan in each of these categories, it does not necessarily mean that you need to immediately run out and get them to raise your credit score. If your credit report only shows credit cards, improve your credit mix by asking other creditors to report your information to the bureaus. According to myFICO.com, creditors such as student loan lenders, credit unions and local retailers are not required to report credit information, but it never hurts to ask. Do not buy a car or anything else just to improve your credit mix score. It doesn’t help your score enough to be worth the money you spend.
Remember, the types of loans you have only make up ten percent of your score overall. The most important factor in your credit score in undeniably carrying a low (or zero balance) and making on-time payments. Having a good mix of credit is like the icing on the cake – not the foundation of your score.
Caution: Do not close any established credit cards to reduce to this number because you also delete the corresponding credit history of the account, which can negatively impact your credit score. This factor becomes less important as the length of your credit history builds and there is more criteria available to use to calculate your score.**
First of all, if you read last week’s blog on the Top 3 things you can do right now, make sure you took action on those items and if so…Yay…celebrate your success!
The key is to take action right away and always, always, always celebrate your WINS as you are creating a new habit of taking immediate and responsible action. The 2nd key is to keep it simple so that you will take action. So this week (in the next 48 hours) it is recommended that you…
- Carefully review your revolving and installment accounts to make sure your credit reports indicate the correct date the accounts were opened – the longer the better. Don’t close unused credit cards as a short-term strategy to raise your score. This may inadvertently decrease your length of credit history and lower your score.
- Use older credit cards with no balance once every six months to keep them active. Make a small purchase and pay it off (preferably over a 6 month period).
- You may also find that your report doesn’t include trade lines or other information that it should. Review your account for any positive credit that is not currently reporting on your credit file. Contact this creditor and ask if they will report your account information to the credit bureaus. If the creditor declines, send your latest payment records for this account to the credit bureaus and ask that they include the account in your credit file.
For additional resources including letter samples, please contact me at Info@CreditGal.CO