Credit is the axis upon which our entire economy is hinged. It is how lending decisions are made daily for the acquisition of certain goods and services. While some argue that it is impossible to realize personal character traits from a credit profile, or that it is unfair to reach certain decisions about an individual based on a three digit score, we must realize that a lot can indeed be gathered from viewing one’s personal credit report. At a close glance, a credit report reveals a person’s payment habits or whether or not they keep their word on fulfilling contractual obligations, whether or not a person overextends themselves or are aggressive or conservative spenders, debt management, whether a person is stable or moves around or even job hops from year to year, and other very important characteristics that are obvious when looking at a credit report.
For example if a person has had a great payment history for let’s say the past 10 years, and then all of a sudden there are a string of late payments over a 6 month period, then they pick back up the pace with their regular timely payments over the next few years, there is usually a story that explains the 6 months where this particular individual got off track. From our experience with many customers that we have helped with our process, you can usually link the 6 months of late payments to a particular change in their lifestyle such as a layoff, payment decrease due to sick leave, divorce, or something to that nature, so it is highly conclusive when looking closely at a credit profile that a lot can be told about a person. Like it or not we live in credit world, and regardless of our own individual opinions or feelings, it behooves us to educate ourselves so that we might come to understand this very thing that affects so many areas of our everyday lives.
I have asked this question over and over again, from the average consumer to the top notch professional banker; “What are the five things that make up our credit scores?” Surprisingly no matter what particular walk of life, no one has been able to tell me these five things which means there is a major disconnect when it comes to understanding credit and why so many of us are struggling with bad credit. Which brings me to another question which is “How can we master something that we don’t understand?” The answer is simple... we can’t!
The five things that make up your credit score are as follows, descending from the most to the least impactful:
Payment History - 35%
This is the biggest most important thing that has an impact on your credit score, and also where it all starts. YOU MUST PAY YOUR BILLS ON TIME! I’ve witnessed in many cases where just 1 late payment has decreased an individual’s credit score by 100 points. While there is no way to effectively measure the detriment of a late payment, know that this is a very key essential piece of your credit, and must be made a priority when entering into an agreement to pay back a loan. It is important to note in understanding credit, that it is very much possible to pay every bill you’ve ever had on time and still have what would be considered bad credit. You must realize again that this is only 35% of your credit score but again, where it all starts. Almost 2/3 of the credit pie has absolutely nothing to do with paying your bills on time. Let’s look a little deeper!
Credit Limits - 30%
Yes, another gigantic piece of the credit pie. This is just as important as maintaining good payment habits. Revolving credit….let’s takes a look at why. Revolving credit is credit accounts that we call “open ended” accounts. Open ended because they have no end date unlike an installment loan such as a car loans, home loans, and some personal loans. These types of loans are called “closed ended” accounts simply because they have an end date. In other words you will be finish paying this loan in 5 years on this particular date.
Revolving accounts are not so, because you can keep paying down the loan amount, and using it over and over and over again. It is important to note that a person’s ability to manage credit card debt, displays a different and very important characteristic and skill set. It displays debt management, judgment, discipline, and patience. Here’s what I mean, and why this is 30% of your credit score. A person that has a $10,000 credit card, with the potential and right to use the whole $10,000 at any given time, but yet doesn’t, displays a certain amount of judgment and discipline. In addition to his wise discretion, this individual never overextends himself, but keeps his balances at 20% or lower at all times, which displays great debt management, AND on top of all of that, he pays it on time every month. This says a great deal about an individual, and whether or not they can be trusted with more. Revolving credit can show characteristics of aggressive or conservative risk taking, instability in one’s income or finances, or even whether or not someone is actually living off of their credit cards which is not a wise thing to do, and so many other things. The way it impacts your score is when your balances on these revolving accounts are too close to the credit limit.
For example in this same example if this individual with the $10,000 credit card limit has $8000 charged to it, it will have a negative impact on their credit score because they have utilized 80% of their credit limit. When using credit cards, to achieve optimum scoring, you NEVER want to exceed 20% of your credit limit or a 20% “debt to credit limit ratio”. This will have a positive effect on your credit score. Give it a try! If your credit scores are not where you need them to be and you have credit cards that are maxed out, if that is the only problem, start to pay down your credit cards to 20% balances and watch the impact it has on your score! The way you figure out what you need to pay each credit card balance down to is done by using a simple formula. Simply take your credit limit, using the same amount in this example of $10,000, and multiply by .2 ($10,000 x .2). This will give you $2000, which means that you never want to exceed $2000 worth of charges or 20% on a $10,000 credit card. You’re own you way… let’s look at the other 3 factors.
Length of History - 15%
This is another important factor in maintaining a healthy credit score. The longer your keep your accounts the better. This is typical and best displayed with open ended accounts. Again, because installment or closed ended accounts have end dates and will inevitably come to a close, and sometimes you may want to pay them off early to avoid extra interest which is a wise thing to do. However, with open ended or revolving accounts it is best to keep using them over and over and over again so you can build up history which will definitely help give you a more well-rounded mature credit profile. In essence it is not a good idea to close credit card accounts as this effects your debt to credit limit ratio. Even if you don’t use them anymore and pay them off, it is a good idea to just let them sit, and never close them.
Account Types - 10%
Your credit profile needs to show versatility and diversity, or your ability to manage multiple accounts. It needs to be a good mix of revolving and installment accounts. When a lender looks at your profile and see that you have the ability to manage a car note, a mortgage payment, and credit cards without missing a beat, that says you can multitask and you are a very financially responsible individual. So mix it up a bit.
New Credit - 10%
It is important to be active and acquire new credit types. This here is a maintenance piece and an ongoing effort to keeping your credit profile stable. In other words if you have achieved and maintained a particular credit score by having a mix of 2 revolving accounts, and 2 installments, then it is highly conclusive that once something is paid off or closed that the dynamics of your credit profile has changed and thereby possibly affecting your score. So if you have two installment loans that have been paid off and are no longer reporting, you may want to open up another installment loan to maintain the stability and overall structure of your credit profile. It’s doesn’t’ have to be a loan for the same amount but at least of a similar type. Meaning installment for installment and revolving for revolving. If you’ve paid off a house, unless you’re into real estate you may not want to go buy another home, but with the opening of another installment account, (it may be a gym membership or something) this allows for additional reporting and the stabilization of your credit profile. This must be done in wisdom and moderation, for when applying for new credit you acquire what are referred to as “inquires” which are request for your personal credit information. When you give a lender permission or permissible purpose to pull your credit report these are known are “hard inquiries” which show up on your credit report. Too many of these in a short period of time will decrease your credit score.

As you can see one must have some knowledge if they are going to become masters of their credit. While these tips are based solely on a combined 25 years of credit experience, for no one knows the actual FICO scoring model, the utilization of the information shared in this link will allow you to achieve your highest credit score ever. Though it may seem like too much information to digest at once, it is definitely something that you can learn and understand in order to stay on the good side of credit.
While credit is important to our quality of life, giving you access to finances which opens the doors to a many new opportunities, we must not be ignorant in this area for it is too important to our lives and the lives of our loved ones. Make the change! Knowledge is power! Contact Integrity 1st today to improve your credit and quality of life!