How to Have Good Credit Scores

The three major credit-reporting agencies (Equifax, Experian, and TransUnion) provide FICO scores (or credit scores) to lenders.

The higher the credit score, the lower the risk; the lower the credit score, the higher the risk. The higher the score, the easier it will be for you to get a mortgage and other credit and you will get better interest rates as well. So, obviously you want to have high credit or FICO scores.

Although no score says whether the individual will be a "good" or "bad" customer, it helps to determine that individual’s ability to repay future debts. Each lender has its own strategy for making lending decisions depending on the loan product but most lenders use credit scores to help them make their decision. There is no single "cutoff score" used by all lenders because there are many additional factors that lenders use to determine actual interest rates. A credit score is only one variable used in underwriting a loan application.

Credit scoring is calculated by a mathematical equation that evaluates many types of credit information found in a consumer's credit file at that specific credit agency. For example, some things that are looked at are Payment History, Amounts Owed in Relation to Available Credit, Length of Credit History, Number of Inquiries, Types of Credit Used, Collections/Charge Offs, Bankruptcies, Court Judgments, and Past Due Balances. By comparing this information to the repayment patterns in millions of consumers' past credit reports, the score identifies the lender's level of future credit risk based on the available information.

Here are some things to help you get and maintain good credit scores:

The first thing any lender wants to know is whether you have paid past credit accounts on time. This is also one of the most important factors in a credit score. However, late payments are not an automatic "score-killer." An overall good credit picture can outweigh one or two instances of late credit card payments or late car payments. By the same token, having no late payments in the credit report doesn't mean the consumer will get a "perfect score." A large percentage of credit reports show no late payments at all, yet they do not have good credit scores. The payment history is just one piece of information used in calculating the score.

Having credit accounts and owing money on them does not mean the consumer is a high-risk borrower with a low score. However, owing a lot of money on many accounts can indicate that a person is overextended (especially when they amounts owed are in close relation to the amount of available credit) and is more likely to make some payments late or not at all. Even if you have perfect payment history, this component of credit scoring can drastically reduce your scores. For example if you have 3 credit cards, each with a credit line of $2500 and you owe on the 1st card $2450, the 2nd card $2350, and the 3rd card is at $2100; the credit program would “read” that you are “maxed out” and are potentially not a good credit risk. A good rule to live by is to use no more than 50% of your available credit on any credit card that you have. That way, you will not be perceived as being “maxed out” by the credit bureaus. The higher your percentage of available credit, the higher your credit scores will be. One of the true secrets to having high credit scores is to maintain low balances on your credit cards.

The length of your credit history accounts for a small percentage of the score. In general, a longer credit history will increase the score. However, even people who have not been using credit long may get high scores, depending on how the rest of their credit report looks. Most of the time, young people will have a short credit history with just a few trade lines. If you only have a couple of tradelines on your credit report, it is CRITICAL that you do not make any late payments, because that will cause your credit scores to go down dramatically since there is not other “good” credit to offset the bad. For a credit score to be calculated, a borrower must have at least one account or trade line which has been open for six months or longer. Also, the credit report must contain at least one account that has been updated within the past six months. If there are no accounts, few accounts, or only inactive accounts, there is not enough recent information in the credit report on which to base a credit score.

To maintain a good credit score, avoids excessive inquiries. Research shows that opening several credit accounts in a short period of time represents higher risk and people that are constantly having their credit pulled to obtain “new” credit are also higher risk. This is especially true for people who don't have a long-established credit history.

This score will consider the mix of credit cards, retail accounts, installment loans, and finance company accounts and mortgage loans. It is not necessary to have one open of each, and it's not a good idea to open credit accounts not intended to be used. The credit mix usually won't be a key factor in determining the total score, but it will be more important if the credit report doesn't have a lot of other information on which to base a score.

Obviously, collections and charge offs are a bad thing. They result from an account holder saying “This person is never going to pay us”. Collections and charge Offs will drastically reduce your credit score. The best option is to pay off any collections or charge offs as soon as possible. If you owe even just one $50 collection, it will really “pull down” your credit scores. I have seen people argue about collections and say things like “They cheated me” or “That isn’t legitimate” or “I am contesting that bill”. Unless you are a victim of identity theft, you are making a big mistake in arguing about a collection or charge off. You may win a “moral” victory in not paying the collection, but you will pay THOUSANDS more in interest charges and fees on every other loan you get because of your refusal to pay the collection or charge off.

Bankruptcies will affect your credit scores for a minimum of 7 to 10 years. The older the bankruptcy is, the less of an impact it will have on your score. Sometimes, bankruptcy is un-avoidable, but your credit score will be better if you can stay away from bankruptcy. Your score will recover quicker without a bankruptcy, even if you have had several late payments.

These are judgments typically filed in federal, state, our county court. They can be for child support, tax liens, or non-payment of debt. If you have any of these things, pay them off as soon as possible. You cannot have good credit scores with these things on your credit report.

This has the most dramatic and immediate effect on credit scores, You can have years of perfect payment history and that can all be offset in 30 days by letting a credit card or other account shift into a “past due” status. Avoid being “past due” on anything and if you are currently past due, get it paid up current immediately. Even with recent late payments, you will have a higher credit scores than if you have current “past due” balances.

If you do not have credit scores, typically we will look to build an “alternative” credit history for you so you can still buy a home. We will ask for payment history from cell phones, utilities, insurance, rent, etc. Usually, we will want to see a good payment history on three “alternative” trade lines to do a mortgage for you. However, few people know that you can get a mortgage even with NO credit history at all. You will need 2 months of house payments for reserves and no down payment, but it can be done.

The following things typically have no effect on your credit score.

The credit industry has decided that it is OK to sell your personal credit information and even the fact that you have applied for a mortgage. This represents a risk to your privacy, and the three major credit-reporting agencies (Equifax, Experian, and TransUnion) have now been ordered by Congress to make the following website and phone number available for consumers to opt-out of this policy.

www.optoutprescreen.com or call 1–888–567–8688

We highly recommend the opt-out option, with identity theft becoming more common, the more precautions you can take to protect yourself and your FICO score, the better.