Want to know how you’re credit score is judged? With a FICO based score, the higher the number, the better your score. Scores above 720 are usually considered excellent (850 is usually tops), those in the 680-720 range are still quite good, while those in the 650-680 aren’t terrible, they will still carry higher rates. Once you start getting below 650 you may have some trouble getting credit or be charged high rates. These are general rules of thumb, though, since every lender has different criteria.
According to FICO, five categories of information (along with their relative weightings) go into your credit score:
– Payment History 35%
– Amounts You Owe 30%
– Length Of Credit History 15%
– New Credit 10%
– Type Of Credit In Use 10%
It’s obvious that your payment history is the most important factor in your score. But there are some finer points here that you may not be aware of: Most lenders don’t report you as late to the credit bureaus until you fall behind by 30 days. (But they will often charge you a hefty late fee if you are just one hour late with your payment.) This isn’t a hard-and-fast rule so always be sure to double check if you’re having trouble meeting the due date. Sometimes lenders will close your account or up your rate if you are chronically late, even by just a few days.
Recent late payments, even for small amounts, hurt your credit score significantly. Late payments will generally remain for seven years, even if you catch up on the account of pay off the bill. See the next chapter for details.
All other things being equal, how far you fell behind is more important than the amount. For example, missing a $20 minimum payment for 4 months in a row will probably impact your score more than missing a $300 car payment on time.
Account balances, however, play more of a role in a score than most people realize. It’s not uncommon to hear, “I have excellent credit” from a consumer who has paid on time, but has a ton of debt – and whose score is suffering as a result. There are several factors that will come into play in this evaluation:
– How close you are to your limits on your revolving accounts such as credit cards and lines of credit. The closer you are to your limits, the worst it can be for the score.
– How much you owe on your total revolving lines of credit. Total up all of your available revolving lines of credit and then total your outstanding balances. Ideally, you want to use less than 10% of your available credit. If you use more of your available credit on your revolving accounts, your score can start to suffer.
– How much you owe compared to other consumers across the country. You don’t have to carry debt to build credit. You do need credit cards as credit references, but you don’t have to carry balances on them. You can use the cards you have for things you’d normally buy, pay them off in full and avoid bad debt.
- The obvious advice is to try to keep your balances, especially on your revolving debt like credit cards (which is often bad debt anyway) down. But there’s also another piece of advice that goes along with this: Be very cautious about closing old accounts.