When someone applies for credit and obtains their very first credit account, such as a credit card or an automobile loan, they’ll soon have an established credit history and credit scores to follow. Scores can rise and fall over time as someone opens up a new credit account and makes payments on the account based upon a predetermined algorithm. There are those that really don’t pay much attention to their credit scores but simply understand that if they make their payments on time their credit will be just fine, thank you. But others want to get their scores as high as possible and keep them there. Higher credit scores can mean lower interest rates as creditors solicit new business from those who have demonstrated a responsible credit history. Even mortgage lenders refer to a chart that provides interest rate adjustments based upon a combination of a down payment and score.
Having a credit score above 750 and higher also indicates the individual has paid attention to what makes up the score and what causes them to move higher or lower and pay attention to what pushes them up and avoid what keeps them suppressed. Let’s take a closer look at how someone can push their credit scores into the stratosphere.
First, there are five primary factors the algorithm refers to when calculating the three digit score that ranges anywhere from 300 to 850. Those factors are the payment history, available credit, length of credit history, types of credit used and inquiries.
The single most important category is the payment history. Timely monthly payments account for 35 percent of the total score. When someone makes a payment on time, it avoids being tagged as a late payment. A late payment is one that is made more than 30 days past the listed due date on the account. Payments that are made a few days past the due date won’t be logged, only those made more than 30, 60 and 90 days past the due date.
The next most important looks at account balances compared to credit lines issued. FICO scores look at how much someone owes on an account compared to the credit line issued. This category represents 30 percent of the score. For example, someone with a credit card account with a $10,000 credit line will see their scores improve when the balance is someone near one-third of the listed credit line, or in this instance around $3,000. But here’s the important part of this category- there needs to be a balance and it needs to be near one-third of the credit line.
It might seem a bit incongruous to think that a zero balance on a $10,000 credit line is actually worse than having a $3,000 balance. But if you think about it, how can the algorithm know that someone uses credit responsibly if no credit is ever taken out? There needs to be a payment history and a balance and it’s these two categories alone that make up almost two-thirds of the entire credit score. Those with excellent credit who work on getting their scores as high as possible know this and pay attention to what they owe compared to their credit limits. By continuing to make payments on time and keeping balances where they need to be scores will continue to rise.
How long someone has used credit makes up 15 percent of the score but there really isn’t anything the consumer can do to manipulate this factor other than time. The types of credit used give a few bonus points to the total score. Having different types of credit accounts helps and avoiding credit accounts from finance companies contributes 10 percent of the total score. And when someone applies for a new credit account, that’s listed as an inquiry. An occasional request for credit won’t harm a credit file but multiple ones over a short period of time do.
This is how borrowers with high credit scores keep them that way and improve them over time. Whether they want to get a better rate on a credit account or simply want to have the very best credit profile possible, they concentrate on making timely payments and keeping revolving credit balances at the proper level.