Everyone knows that credit scores can be confusing; how they are calculated, what goes into them, why they change, etc. There are constant inquiries from frustrated loan officers and borrowers not
understanding why a score is low when they can find nothing wrong on the credit report. No late
payments, or maybe just an old late payment, no collections, public records, etc. A lot does go into the scoring models and credit scores can change daily for various reasons. But consumers can take some of the confusion away and take better control of their scores by following four simple rules:
1. Pay your bills on time
One 30 day late payment can have a huge impact on your credit scores. The type of account has no
bearing on the impact of a recent 30 day late. For example, a 30 day late on your mortgage carries no more weight then a 30 day late on a department store credit card. Any current 30 day late can easily drop a score 100+ points. What is important is not what account the late occurred on but when the late payment was. Any late in the last 12 months is going to have the greatest effect. The same is true of a collection. It doesn’t matter what the collection was for or what the dollar amount is. A medical
collection for $30 will have the same negative effect as a $3000 collection for a charged off credit card that has been turned over to a collection agency.
2. Keep your revolving balances low
This can, at times, be easier said then done. A large amount of a consumer’s credit score is based on their revolving balances. Optimally credit card balances should be kept below 20% of the credit limit. The higher the balance goes, the more it hurts. Another important thing to remember is to actually keep a small balance on at least one credit card every month. Having no revolving balances can actually have a negative effect on a credit score. So even if consumers pay off their credit cards every month, always keep a balance on at least one…just make it a small balance.
3. Don’t open new accounts
Unless you have to. Any time you open a new account it will, at first, have a negative effect on a score. It will be a new inquiry, a new account with no history, and if it’s a credit card could also start out with a high balance. This combination can have a significant negative impact on a score.
4. Don’t close old accounts
Sure if you have 20 credit cards and don’t use half of them, it would probably be ok to close some of them. When you close accounts though you are also closing out that history and the scoring models like to see open account with long histories. So unless you have a large amount of open accounts that you don’t use keep them open and use them occasionally. If you don’t use them, the creditor may close them. If you do choose to close some accounts it would be best to close the ones that have the shortest history on them.
This may seem like Credit 101 but achieving and maintain a good credit score can be this simple. It may not always be possible to follow these rules 100%, but the more you adhere to them the better your score is going to be.
Author: Mindy Leisure, Advantage Credit www.advcredit.com
