Everyone wants a great score but most don’t understand the ins and outs of optimizing credit score. Knowing the elements of a credit score and implementing a few basic ideas can give you a 40-100-point boost.
There are three credit bureaus: TransUnion, Equifax, and Experian. They use a different matrix to calculate your credit score depending on who is pulling the credit. If you are applying for a credit card, auto loan, or home loan, you can get three different scores. The mortgage lender will show a lower score then the credit card company since the mortgage “pull” is the most conservative. Scores range from 350-850. You will need at least a 620 to get a mortgage and for some home loans you need a 700 or 740 minimum. The higher your score the better the interest rate.
The five elements of credit score include:
- Payment history: 35%
- Outstanding credit balances: 30%
- Credit history: 15%
- Mix of credit types: 15%
- Inquiries: 10%
The number one thing you can do for optimizing credit score is pay your bills on time, avoid collection accounts and judgments for late payment. The most recent six months will have the biggest impact on your credit. For example, if you have a 30-day late payment that reports in the current month, your score can drop 40-60 points compared to a 30-day late payment eight months ago or longer. 60-90 day late payments will really drop the score.
Outstanding credit balances
This is another very important and little known task for raising your score. This applies to revolving accounts like credit cards and home equity lines. You want to keep the balance at 25% of the credit limit, even if you pay the bill off in full every month. For example, if you have a $10,000 credit limit, never charge more then $2,500 per month on that account. Instead of maxing out a card, spread balances across several cards to keep the balances below 25% of the limit. Use credit sparingly.
Credit history refers to how long you have had credit. The longer you have credit, the better. Don’t close accounts, especially accounts you have had for a long time. Avoid new credit card applications, especially from stores like GAP, Best Buy, etc that offer you a 10% discount for opening an account. They normally give you a low limit that gets maxed out and then you forget about the account and miss the first payment. These go against the first two elements.
Mix of credit types
This means having different types of accounts; mortgage, revolving/credit cards and installment loans, like a car loan. The optimum number of credit cards is two to three accounts. I recommend quality accounts like VISA, MasterCard, and American Express. If you have never had a car loan and can paid cash for a car, I recommend opening a car loan, make payments on times for six months, and then pay off. This demonstrates you can consistently make the same payment each month and then successfully pay off a loan.
When a creditor pulls your credit, it reports as an inquiry on your credit. This is actually the least impactful element on optimizing credit score. You are allowed the opportunity to “shop” and have your credit pulled with less impact. For example, if you are going to buy a car on a weekend and three different dealerships pull your credit, it will count as one pull. But if you apply for a car, a credit card, and a mortgage in the same weekend, that will be three credit pulls.
By Amy Cairn – Senior Loan Consultant at Guild Mortgage. Amy is always happy to discuss your personal situation and answer questions. She can be reached at: