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Recent events should direct your attention to an important barometer of our financial lives. Current interest rates will remain at the near the level they are now until at least the end of this year. Hopefully, they don’t go any higher. You want your credit score to be as high as it can be so the interest rate you pay on major loans is as low as it can be.
There are three repositories of credit information lenders rely on: Equifax, Experian, and Transunion. Each have their own methodology of determining your credit score, but all weigh the factors affecting your credit score the same.
Making your payments on times comprises 35% of your credit score; being late on making those payments will reduce your credit score the most. One delinquent payment can lower your credit score by as much as 20-40 points depending on the other components of your credit score. A late mortgage payment or vehicle payment will have the most negative impact on your score.
Making a minimum payment on a credit card on time does not affect your credit score. Making an overdue payment on any other loan will lower your credit score. Always make the minimum payment! Don’t lose 20 points in credit score because you didn’t pay a $40 minimum payment.
Another factor - 30% of your credit score is determined by the amount that you owe in relation to how much total credit you have on credit cards. The higher the amount you owe (utilization rate) on a credit card in relation to your maximum limit the lower your credit score will be.
To maximize, maintain, or increase your credit score, you should keep your balance at or below 20%-25% of your available credit. If you have $10,000 available credit the balance should be less than $2,500 to maintain a higher score. Paying balances below this percentage or paying balances in full will increase your score.
How long you have had credit makes up 15% of your credit score. Its make sense for young people to get a credit card as soon as they have a way to repay it. And, once a young person has acquired credit, it is important to manage it effectively to achieve a high score. Establishing credit is a challenge because no creditor wants to be the first to grant someone credit. I suggest that you don’t even apply for regular credit card. A secured credit card is the answer. A secured card is a major credit card secured by funds the borrower deposits with the credit card issuer. Deposit $300 with them and you are issued a Visa or Mastercard with a $300 limit. Default on the card and they keep your money.
Some car dealers may have loan products available to those with no established credit. If your first obligation to repay is a car loan, I suggest that after you have made 2 payments, you apply for a regular credit card because you have established a payment history with your vehicle loan. Having a revolving credit account or credit card and an installment loan will give you a mix of credit.
The mix of revolving and installment debt that you have accounts for 10% of your credit score. You want to have revolving accounts and installment accounts, even if they were paid off years ago.
How much new credit you have acquired recently impacts 10% of your credit score. If you have two new credit cards in the last 60 days your score will go lower. Getting a 0% credit card to pay off an 18% card three times in the last year may save in interest, it will lower your score.
The history of what you do today with credit will be documented and part of your credit history for seven years. As challenging as our finances may get for the next 6-12 months pay particular attention to making sure you pay your debts as agreed. Strive to pay off your debts sooner rather than later and only borrow what you feel you can reasonably repay.
