Your Credit Score

I've mentioned the FICO Credit Score a few times in my previous posts, but I recently took a look at my credit score and thought it would be helpful to share with everyone what are some of the positive and negative factors that go into your score.  I'll list out the main ideas and then paste the details that came with my report below.

1. Always make your payments on time and never miss any if you can avoid it.  Make sure you don't miss consecutive payments which is often worse than missing a few stand-alone payments (separated by a few months).

2. Make sure you have a few accounts with access to credit, but avoid signing up for too many (or signing up for several in a short amount of time).  I'm not sure what too many is, but it is probably safe to say that double digits is pretty high (if you wake up one day with 10 or more cards).

3. Make sure your credit lines report your credit limit.  If you have a credit card but it doesn't report your credit limit, then it's hard for future lenders to gauge how much credit you have been trusted with in the past.

4.  Establish a credit history early, at least a few years before you plan on applying for loans.  Short payment histories are negative, since it doesn't provide very accurate or reliable information on your payment habits for lenders.  Below, it says shorter than 3 years is way too short and shorter than 7 years is risky.

5. Avoid running a high balance on your lines of credit.  Lenders will worry that you are living beyond your means.  Running a low balance frequently is the best for your score; running no balance may be negative since it doesn't provide additional information on your repayment habits.

6.  Avoid applying for credit before applying for credit.  When you need a loan, make sure you don't apply for credit cards the prior year since lenders worry that you may be trying to take on too many new accounts at once.

"Any history of late payments (including missed payments and derogatory payment statuses) is a negative factor. No reported history of payments on any account is also negative because lenders cannot tell whether you paid on time or were late. Some cases of late payments are worse than others. If you have not been late with any payments recently, lenders may think you are responsible and do not (or will no longer) miss payments. Lenders realize that many people occasionally pay late. Therefore, being late with a single payment is typically not as harmful as being late with two or more consecutive payments. Similarly, being late on many accounts is typically worse than being late on just one. Also, lenders may view late payments as a more serious problem if you have collection accounts or negative public records such as bankruptcies or court judgments. These types of credit records indicate a pattern of credit problems. Finally, it may not be as harmful to be late with your payments if the past due amounts are small, because lenders stand to lose less money if they remain unpaid."


"Having accounts listed in your credit reports is a positive factor because the payment history of these accounts shows lenders how well you pay your bills. Therefore, having too few accounts may be considered negative. However, having too many accounts or adding new accounts too quickly may also be considered negative because lenders worry that you are spending (or preparing to spend) beyond your means, even if you have never been late with any payments. Note that closing accounts will not change this. Also, if you do not currently have credit, getting your first few credit cards may be difficult and may involve high fees, high interest rates, and low credit limits. Note that accounts from personal finance companies (which specialize in lending to people with credit problems) may be considered negative."


"Having accounts with high credit limits or loan amounts is a positive factor because it indicates to a lender that other lenders have trusted you with a lot of credit in the past. On the other hand, having accounts with low credit limits or loan amounts is a negative factor because it may suggest a lack of confidence from those lenders. Finally, having no accounts with reported credit limits or loan amounts is a negative factor because lenders cannot evaluate your existing credit usage and the confidence that other lenders have shown in your ability to repay your debts."


"Having accounts listed in your credit reports is a positive factor because the payment history of these accounts shows lenders how well you pay your bills. Therefore, having too few accounts may be considered negative. However, having too many accounts or adding new accounts too quickly may also be considered negative because lenders worry that you are spending (or preparing to spend) beyond your means, even if you have never been late with any payments. Note that closing accounts will not change this. Also, if you do not currently have credit, getting your first few credit cards may be difficult and may involve high fees, high interest rates, and low credit limits. Note that accounts from personal finance companies (which specialize in lending to people with credit problems) may be considered negative."


"High balances are a negative factor because lenders worry that you are living beyond your means and may not be able to repay them. This is particularly true for credit cards. For installment loans such as mortgages and auto loans, lenders often use the proportion of the loan that is still unpaid to judge your ability to take on new debt. If very little of your installment loan balances have been repaid, lenders may not give you more credit that could add to your debt. No matter how high your income, having a lot of debt may lower your credit scores because lenders know that adverse changes in your employment and life events such as divorce or illness may make it harder to pay your bills. Low balances, on the other hand, are a positive factor because lenders do not stand to lose as much if you become unable to repay them. However, not using your credit accounts at all may be considered a negative factor, because it does not provide lenders with information about how you typically use credit and repay your debts."


"Applying for multiple credit accounts within a short period of time can lower your credit scores. When you apply for any type of credit (such as an auto loan, credit card, department store card, or mortgage), the lender considering your credit application checks your credit history. This is recorded in your credit reports as a "hard inquiry." Although inquiries are an unavoidable result of applying for credit, lenders dislike seeing too many inquiries within a short period of time (such as 12 months) because they cannot tell whether you are "shopping" for the best offer or if you are desperately trying to obtain credit because of financial trouble."