I have compiled some basic information you may find helpful and also included some tips to improve your credit profile. Understanding your credit history and how your scores are determined is essential financial knowledge. Additional information may be found on www.annualcreditreport.com
A person’s payment history is the most influential factor (accounting for 35%) when determining a credit score…
- Paying bills on time is by far the most important.
- If you are currently behind, it is crucial to make the account current and keep it that way. Recent late payments will have a greater (negative) impact, but with time they will be less influential.
- A collection account can be the single most damaging influencer when it comes to derogatory reporting. In some cases, an account may have been paid in full, but that account is still reflecting a balance being owed. Having the reporting brought up-to-date may result in a substantial improvement in the credit file.
- Certain kinds of debt are deemed to be more important or influential than others. These accounts seem to carry more weight when calculating scores. A late payment on a mortgage is far more damaging than a department store credit card. The “unofficial hierarchy of credit” with regards to credit scoring appears to be something like this:
- Home Mortgage
- Student Loan
- Installment loan / Lease payment
- Major Credit Card
- Department Store Credit Card
- Finance Company Debt
Closing an account will not remove its history from your report. That information will remain on a report for at least seven years.
The balances of accounts are responsible for approximately 30% of your credit score…
Keep balances low on credit cards and other “revolving credit”. High outstanding debt can affect a credit score.
Pay off debt rather than moving it around. The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
Don’t close unused credit cards as a short-term strategy to raise your score.
Don’t open a number of new credit cards that you don’t need, just to increase your available credit. This approach could backfire and actually lower your score.
The length of credit history is responsible for around15% of your score…
Opening new accounts will lower the average age of your existing accounts thus lowering your credit score.
The amount of time since the account was last used will also be a factor. Dormant accounts will have less of an affect than those that are used on a regular basis.
New Credit is responsible for approximately 10% of your score…
Avoid opening numerous “new accounts” at the same time. A drastic increase in the amount of available credit (over a short period of time) will have an adverse affect on credit scores.
It is highly recommended that shopping for financing take place over a short period of time. Credit scoring is able to differentiate between a search for a single loan (a car or mortgage for example) and a search for multiple lines of credit (credit cards and department store lines of credit).
The types of credit used will determine around 10% of your score…
Having in excess of 5 revolving (credit card) type accounts can have a negative effect on credit scoring. This can lend itself to overextension by having too much credit available.
Having fewer than 5 revolving accounts can also have a negative influence. This may be viewed as an inability to obtain and/or maintain credit.
This article was written for us by Anna Mae Smith from Prime Lending. Anna’s cell is (518) 368-4404.