How to Build a Killer Credit Score

With the current housing/mortgage environment it’s more important than ever to have a great credit score particularly if you are considering purchasing or refinancing.

“Credit Crunch”, 2 words we hear often in the news. Interestingly enough with rates at a historical low it is becoming more and more difficult to obtain home loan financing!

What is occurring is that lenders are looking more closely at credit histories of would-be borrowers; those with high credit scores, over 740, are being approved while those with lower credit scores are being denied. Even those with average scores are now either turned down or expected to pay higher interest rates than they anticipated.

What can be done about this situation? Well, we can wait for the “credit crunch” to pass (how long will it last?), or work on our credit history to get the score up.

There are 3 major factors that impact your credit score the most, so let’s take a look at each:

Payment Record
The most important factor (35% of a score) is your payment history. Those that pay their bills on time score higher than those that don’t. Now, anyone can experience financial difficulties which results in late payments and damage to one’s credit rating. But keep in mind that the damage is never permanent.

Late payments that have the biggest impact on credit ratings are those from the most recent 12 month period. Thus it follows that if a person starts paying bills on time, and continues doing so for 12 months, they will see their credit score improve. The more time that passes, the better – late payments over 2 years are almost never counted.

But note: not all late payments are the same. Installment loans, i.e., mortgage late payments carry more weight than a revolving credit card late payment. Also being thirty days late is not as bad as being sixty days late. Furthermore, not all creditors bother reporting you if you are less than thirty days late.

Because making payments on time is so important, it’s a good idea to come up with a way of paying bills that minimizes the chances of being late. Online banking is one such way. You can also make a checklist of all bills with due dates and use it regularly.

Balances
The second-most important factor in determining your credit rating (30% of score) is how much in debt you are. A common misconception is that the total amount of your loans is what counts toward your score. Actually what counts is the total amount you owe compared to your credit limits.

For example: Erwin owes $3000 on his credit cards, and his total credit limit is $4000. So, Erwin is using 75% of his available credit. Linda also owes $3000 on her credit cards, but her total credit limit is $10,000. Linda is only using 30% of her available credit. Even though Erwin and Linda owe the same dollar amounts on their cards, Linda will likely have a better credit score because she is less in debt percentage-wise.

The best course of action is, naturally, to keep your balances low. If you owe less than 30% of your total credit limit, than you are in good shape. Go higher than that and your credit score will progressively go down.

Keeping all this in mind, let me bring up one more point – closing credit cards that you no longer need can actually hurt your credit score. There are 2 reasons for this:

1. One less card means the decrease in your total available credit, which means the percentage of your indebtedness goes up which means your credit score goes down.
2. And, the average age of your accounts is important but only on open accounts. If you close an older card the average age of your credit may go down and consequently your score will also go down.

Which segues into –

Age and Type of Accounts
The last major factor in your credit score (25% of score) is the type of accounts you have open and their age. There are 2 basic account types:

• Revolving – such as credit cards
• Installment – such as mortgages, car loans, etc.

Creditors like to see that a person is able to manage both kinds. Therefore, having a bunch of credit cards but no other loans will depress your score. However, having a student loan, or a car loan, or any other loan in addition to a couple of credit cards, gives you the kind of mix that will bump your score up.

As stated above the age of your credit is also important. So don’t close credit and suddenly open several new accounts. This will decrease the average age of your credit history and decrease your score. The more established your credit history looks, the better.

Maintaining and developing a killer credit score is more important today than ever. By focusing on building up your credit history and raising your score the more financial options you’ll have available. For those with the highest credit score, you’ll get the best mortgage options with the fewest fees and the best interest rates.

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