Credit Score Maintenance

No one wants to be just a number

But in today’s world, having a good credit score – and having a good one – is almost as essential as having a job. Maintaining credit can be tricky, especially because some of the actions that a consumer might take concerning their credit that seem logical from a savings and budget perspective, may actually hurt your credit score. Below, we break down the 4 key factors that affect your FICO score and how to apply this knowledge to get the score you want:

35% – Payment History

How you pay represents over one-third of your credit score. Your credit score factors in how many times you have been 30 days, 60 days or 90 days late on any of your obligations listed on your credit report. This includes your car payment, your mortgage, student loans, personal loans and credit cards. Even just a few recent late payments can hurt your score, especially if you have a thin credit file without several other paid out tradelines to outweigh the derogatory marks. Public records, judgments, tax liens and collection accounts damage your score further. Depending upon the severity of these type of items, a lender may not be able to consider you for a loan.

If you hit a rough patch with your income or employment and are late on a few payments, the best practice is to get back on track with them as soon as possible. Although the late payments will likely report to the credit bureau, the late payments will affect your score less and less as time goes on (provided that you have a satisfactory pay history from that point forward).

30% – Credit Utilization

If you are of the school of thought that you should pay off and subsequently close credit cards you aren’t using you may be hurting your score indirectly without even knowing it.

Credit Utilization refers to the amount of your available credit that you are using. Let’s say you have a credit card with a $1,000 limit and another with a $3,000 limit. Your total available revolving credit  is $4,000. By FICO standards, you want to keep your outstanding balances as close to 30% of $4,000 (so, $1,200) as possible. Keep in mind the 30% guideline applies to balances on individual cards as well as to your total available revolving (credit card) credit.

The utilization factor also considers your installment debt, such as your mortgage or auto loan. Although these differ from a credit card in that you are (generally speaking) paying the balances down without increasing your credit obligation you may notice your FICO score taking a hit upon taking on a sizable new loan. Not only does a new loan increase your debt load, but it represents new credit that doesn’t have an established pay history yet. As you pay installment debt down as long as payments are made on time these tradelines typically help boost your score.

15% – Length of Credit History

Length of credit history refers to how long you as an individual have had a credit file (i.e. tradelines/established credit) as well as the recency of using your established credit. This factor also considers the age of your oldest account against the age of your newest account and essentially takes an average of the age of all of your open accounts. For this reason, it may not be prudent to close that credit card that you’ve had open for 10 years but don’t really use. In fact, it would be better to a least use some of your oldest credit cards occasionally and pay the balance off just to keep activity on those cards. Your length of credit history factor will examine this as well.

10% – Types of Credit

While there is no exact formula for an ideal credit file, the credit bureau likes to see a “healthy” (i.e. in good standing) mix of different types of credit. By this token, a healthy borrower would have a mix of revolving (credit card) accounts, some installment credit (car loan(s), furniture loans, etc.) and a mortgage loan. When an individual has different types of credit, they are viewed as a more experienced borrower.

10% – New Credit

The credit bureau doesn’t designate a specific timeframe that borrowers need to wait to establish additional credit after previously securing credit. However, it is a general rule of thumb that opening several new credit accounts at once represent a higher risk borrower (thereby, a lower FICO score would be the expected result). When borrowers are just starting out, we recommend waiting at least 6 months (if not longer) before establishing another credit account.

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