Most people assume that only thing you need to do to keep a good credit score is to simply pay their bills on time. While payment history is the most important factor in a credit score; accounting for about 35% of it there are actually several other factors that play a part. We speak to clients all the time that have never missed a payment on any debt or bill yet still are unable to get approved for a mortgage or car note. So what are they doing wrong?
Keeping A High Balance
Most people are unaware of something called “credit utilization ratio”. What this refers too is how much of your available credit you are using. Let’s say you have a credit card with a $10,000 limit and you carry a $9,000 balance then you are using 90% of your available credit. This is bad and to the credit bureaus it makes you seem like a person who is at risk of defaulting. We recommend that if you are going to carry a balance on a card that you keep it under 20% of the available limit. With “credit utilization ratio” account for about 30% of your credit score it is very important.
The next most important factor in your credit score is “length of credit history” which account for roughly 15% of your credit score. This the average time of your accounts have been. When you cancel a card you not only lose that available credit for your ratio but that card will stop being positively reflected on your “length of credit history”. If you have paid off the balance of a card to keep it active you can choose to only use it say once a month on a small purchase then promptly pay off that account every single month. This will ensure that account continues to positive impact your credit score.
Not Having Enough Variety In Debts
The credit bureaus like to a few different types of accounts on your credit reports when they tabulate your score. This means not only having credit cards or unsecured loans but also having say a car note or a mortgage which is secured. Having a variety of credit accounts shows the bureaus that you are a stable person whose life is in order. Your “types of credit” account for about 10% of your score.
Applying For Too Much Credit Too Quickly
The last mistake people make is going out and applying for too many accounts at once. You see this a lot with people who are trying to get a credit card and are worried they may not qualify so they will apply to several issuers at once. Each time your credit is pulled when you apply for credit leaves a mark on your score. A make every now and then won’t impact your but a few in a short time certainly will. Your “new credit inquiries” account for the final 10% of your credit score.
As you are looking to build your credit it is a good idea to look at all these factors. If you keep up with each part of the credit score you will be on your way to the home of your dreams at a rate you can afford. Don’t make the same Credit Mistakes.