During the pandemic people have discovered a need to question everything. Where we live, where we work, how we spend our money, and how we spend our time. While travel and dining have taken a huge hit, things like pools and RV sales are exploding. Excellent credit has always been an important component to living responsibly, but today it has become even more important as people change careers, move households, and embark on opportunities.
Achieving an 800 Fair ISAAC Corporation (FICO) score can seem like a daunting task but is easier than you think if you understand the five principles of how your credit score is determined. Here is a closer look at the five credit scoring factors:
PAYMENT HISTORY
Payment history determines 35% of your credit score. How timely you pay your bills affects your credit score more than any other factor. Serious payment issues, like charge-offs, collections, bankruptcy, repossession, tax liens, or foreclosure can devastate your credit score, making it almost impossible to get approved for anything that requires good credit. You can dispute collection accounts by writing letters to Experian and TransUnion.
DEBT RATIO
Your debt level determines 30% of your credit score. As a guideline, you should keep your credit card utilization at 30% or less, meaning only charge up to 30% of any card’s available limit. Having high balances or too much debt can heavily affect your credit score. The good news is that your credit score can improve quickly as you pay down your balances. If you are looking to build your score, you can get secured credit cards that report monthly and pay off the balance monthly to increase your score.
CREDIT HISTORY
The age of credit is 15% of your credit score and considers both the age of your oldest account and the average age of all your accounts. Having an “older” credit age is better for your credit score because it shows that you have a lot of experience handling credit. Opening new accounts or closing existing accounts can lower your average credit age. For that reason, it is typically not a good idea to open several new accounts at once. Transferring balances to a new credit card is only recommended if you are seasoned in understanding your credit.
CREDIT TYPE
Two basic types of credit accounts exist: revolving accounts and installment loans. Having both types of accounts on your credit report is better for your credit score because it indicates you have experience managing various types of credit.
It is even better if you have loans for different types of assets, such as a car or a home, in addition to credit cards, and maybe a student or personal loan. However, the types of credit only constitute 10% of your credit score, so not having a certain type of credit, such as an installment loan, will not devastate your scores.
INQUIRIES
Each time you submit an application that requires a credit check, an inquiry is placed on your credit report showing that you have made a credit-based application. Inquiries make up 10% of your credit score. One or two inquiries will not hurt much, but several inquiries, especially within a short period of time, can cost you many points off your FICO score. Keep your applications to a minimum to preserve your credit score.
Typically, the inquiry will drop off your report after two years. If you are looking to purchase a car, get a preapproval from a credit union, then test-drive several vehicles without letting them pull your credit.
Building your FICO score is half the battle, maintaining a good score is the other half. Be careful of co-signing for other people and never share your score online unless you trust the institution you are sharing it with. With COVID-19 this is the perfect time to build your scores if they are low. You never know when you will need your credit.
