5 Ingredients of an Ideal Credit Score

A lot of consumers have the mindset that making payments on time automatically equates to a good credit score. This couldn’t be further from the truth. Paying your bills on time is an important ingredient of your credit score; however, there is a lot more to having a high score. Making your payments on time only makes up about 1/3 of the points in your credit score. The other 2/3 of your credit score has nothing to do with making your payments on time.

Making your Payments on Time is the most important ingredient of having a good credit score. Likewise, if you have a history of late payments, collections or charge offs you will not do well in this category. The more negative items you have on your report, the more your score will suffer. The more recent your delinquencies, the more they will impact your score. Time will heal in this category.

The Amount of Debt you carry is by far the second most important ingredient. Your mortgages and auto loans (installment debt) are included in this part of your score, but it’s the credit card debt you carry that is really the most important part of this ingredient. This includes anything from MasterCard, Visa, American Express, and any other revolving account you have like gas cards and even department store charge cards. The balances you carry on your cards versus your available credit calculates your “revolving utilization percentage.” The higher your utilization percentage is, the more of a negative impact on your credit scores. You can calculate your “utilization percentage” by adding up all of your charge card balances and dividing them by the total credit card limits you have available, then multiply that number by 100.

The Age of Your Credit History is a secondary ingredient. Don’t confuse this with your age. The longer your accounts have been open, the more points you’ll earn for your score. Never try to remove old, good accounts from your credit report because that will shorten the history of your credit file. As your accounts get older, you will gradually (automatically) earn more points.

Credit Mix is another secondary ingredient. What types of accounts do you have? You will do well in this category if you have a diverse list of accounts on your credit report. The ideal mix is 3-5 revolving accounts, a mortgage account and an auto loan. You can have a really high credit score if you don’t have this exact mixture because this is a secondary category. DO NOT START CLOSING ACCOUNTS IF YOU HAVE MORE THAN 5 REVOLVOING ACCOUNTS. Remember the category we discussed in the previous paragraph? Closing established accounts with a good, lengthy history can potential have a much more devastating impact on your score than having the proper mix of credit. Best advice here: if you have less than 3 revolving accounts, open a new account. If you have more than 5, only close an account if it has been opened for a short period of time.

New Credit Inquiries is the last ingredient and it also is a secondary ingredient. When you apply for credit you are giving the lender permission to check your credit history and credit scores. Each time this happens your credit report will reflect an “inquiry.” To maximize your score in this category, only apply for credit when you really need it.

Now you have the recipe for an ideal credit score.

Need more information? Email me or visit Credit Strategies online.