Understanding your credit score and why it seems low or high is best described in terms of weight. Some factors have a Heavy impact and some have a Light effect to your score. Here is a breakdown of the hard facts on how your daily decisions effect your scores.
- 1. Payment History- Heavy Influence
This one is a "no-brainer". If someone cannot pay their bills on time the scores will drop dramatically. Adversely, if you have amazing payment history (or late payments fall off after time), your score will skyrocket. Rest assured, 1 or 2 day late payments are almost never reported to the bureaus. Late payments are usually only reported when a payment is 30 days or more late. Payment reminder's are a great way to curb late payments and late fees.
- 2. Hard Credit Inquiries- Light Influence
That's right! Inquiries are a minor factor in your score reflection. So if you make many inquiries in a 3 month period (more than 8) then it will mildly hurt your score. At the same time, if you never inquire for credit, it will help your score a little. Some inquiries don't hurt your score at all! How to tell the difference? An inquiry for new debt will always be a "hard pull".
- 3. Credit Card Balances- Heavy Influence
I was tempted to type "Extremely Heavy Influence". Having high balances or maxed out credit cards is the number one killer of credit scores; even more harmful than a bankruptcy in many cases! Credit utilization is understood 2 separate ways: overall credit card utilization and individual credit card debt. The point is, if you have 3 credit cards paid off and 1 maxed out, your scores will still drop! The trick is to get all of your credit cards or charge cards under 30% of its respective limit.
- 4. Age of Credit History- Average Influence
This one you have little control over. It's also the reason young adults usually cannot qualify for certain types of loans when denied on the basis of credit. Try not to close your oldest cards! Even if they have high interest rates. If you are determined not to use them just cut them up and forget about them as long as they don't have annual fees. When the average age of your accounts are 8 years and over, your scores will improve.
- 5. Trade Lines/ Total Accounts- Light Influence
The more trade lines you have reporting to the bureaus the better. The sum of open and closed accounts are included in the total trade lines. It will help your score the higher that number gets. A good benchmark for total account would be around 22. Checking and savings accounts do not apply. Accounts that you would find on your credit report would be mortgages, auto loans, credit cards, charge cards or store specific credit cards, and of course bankruptcies, collections, and delinquent accounts. Which leads me to my last point,
- 6. Derogatory Marks- Heavy Influence
Removing derogatory marks and collections from your credit report is crucial in restoring your scores. This feat is also one of the most difficult. Collections can be anything from an unpaid medical bill to walking away from your gym membership. Nonpayment is the number one reason for derogatory marks but they are not always easy to get rid of and some marks can't be "cleaned" by a credit cleaner. I'll cover cleaning your credit in another post and Youtube video.
Also- for especially tricky situations or questions not answered by the blog, email me at clay.matthews@nafinc.com.
Have you ever been surprised that you were turned down for credit? (credit card, auto loan) Please share your experience in the comments section below!
