Above is a chart that shows how the credit bureaus value the various parts of your credit in order to determine your score. Source: Fair Isaac Corp.
1. Payment History - Your history of making payments on time helps to increase your credit score the most. Typically, the last 12 months of payment history is much more important than any other history before the last 12 months. On top of that, it is more important to keep the mortgage payments on time than a credit card or energy bill.
2. Amounts Owed - This is the total balances of all revolving accounts over the total credit limits that are reporting. Revolving accounts are credit cards and personal lines of credit that you can draw on at any time and is an unsecured loan. A mortgage is a secured loan to your property and you are not allowed to used the remaining money you have paid down over time.
Example: Lets say you have 3 credit cards. Each of the three cards has a balance of $500, which gives you a total balance of $1500 for all three. Now, the credit limits of all three cards are $1500, so the total of all your limits is $4500. Take the total balance, $500, over the total limits, $4500, and your percentage of usage is 33%. It is said that you shouldn’t exceed 30% otherwise your score will start to drop, because the credit bureaus will thing you are charging more than you can handle.
Here is another thing to keep in mind. Lets say you transferred one of the $500 balances to another card and closed that card. You still have a total amount of $1500, but your total limit is $3000, since you only have two cards now. Take the $1500 over $3000 and your percentage is now 50%! There is nothing wrong with transferring a high interest rate balance to a lesser rate card, but don’t close the card where you transferred the money from. Keep the card open, put it somewhere where you won’t use it. If the credit card company gives you a hard time about not using the account after a certain period of time, then just charge something small once in awhile and keep the balance low, if not at $0.
3. Length of Credit History - This one is pretty self explanatory. The longer you have credit history the better, especially on a couple of credit cards. Opening a new account just to take the 0% interest for a short period of time and then closing it is going to hurt the part of “length of credit history”. To help offset this, you want to keep at least 2 credit cards open for a long period of time. 2 or more years is a good history to have. The bureaus won’t even grade a new account if it doesn’t have at least 6 months of payment history. For those people that are new to credit, like a college student, it is best to start at least one account and keep the balance low and payment history on time. By the time a year or two passes, he or she will have built up a decent credit history, even with one account.
These are also the types of things to keep in mind when trying to rebuild your credit for a mortgage refinance or buying a new home. If you are looking to refinance to get out of an adjustable rate or just trying to get a better interest rate, take the time to use this advice and get the credit scores as high as possible. This way you will save more money every month, along with less interest over the life of the loan.
If you liked this post, you should read Understand The Simple Steps To Build Credit Scores.