Your credit number is crucial to securing loans and increasing credit. But what’s MORE important is the reason why the number is what it is.
For example, you could have newly-established credit giving you a higher score.
However, if you have a 720 score (but only one card), you may not be approved for a new card or loan very easily. On the other hand, someone who has a 700 score with 5 cards, without any late credit card payments for 8 years stands a much better chance of being approved for another card or loan.
Why Does This Happen?
The reason is that you aren’t just judged by your credit score, you are judged by the six factors of your score.
The reason behind this is more complex than simply being judged by your credit score. You are judged by six different factors on your score. Let’s take a look at what these are:
1. The Aspect of Utilization
Utilization is defined as how much of your credit line you are actually using. This is one of the most significant factors impacting your credit score, so it’s important that you manage this aspect of your credit carefully. The general rule of thumb is to keep utilization below 30%.
I always say aim for 20%. In fact, if you are able to manage it, don’t carry a balance at all. One aspect of utilization that isn’t explained with clarity is the difference between your payment due date and the time your statement reports are sent to the credit bureau.
The three credit bureaus are:
Each month, these credit bureaus report your credit history based on the information they receive from each of your creditors. Take a look at what happens to most people:
They may have a clean repayment history because they make it a point to clear their credit card payments each month in full or under 30%. However, they also use the same card again before the statement closure date.
This information is relayed to the credit bureau, and has the potential to damage their credit score.
Let me explain this in a simpler way via an example:
Let’s presume I have a credit card that’s due on the 15th with a statement closure date as the 21st. I have a credit line of $1000 and I pay the balance off in full on the 15th. However, I then make a $400 purchase on the 18th.
I’ve technically paid off the card in full, before the due date. But because I used $400 of my credit line before the statement closure date, that gets reported to the creditors.
Their records will now state that I used 40 %( $400 of my $1000), which doesn’t reflect well on my score.
Tip: Once you’ve paid your bill ON TIME, wait until after the statement closes before you use that card again. This is one of the crucial points I would like you to take from this blog post.
2. Payment History
Ok, this one’s pretty simple… Just make it a point to pay your bills on time. If you stay ready you won’t have to get ready. Put all your bills on autopay and you won’t miss any payment due dates. You can simply set the autopay up for the minimum amount due and make an additional payment manually to ensure you’re under the proper utilization amount.
Even if you end up missing a payment by a few days, your creditor won’t report it. A missed payment only shows up on your credit report if it is 30 days late.
This also means, if you are late, it’s crucial that you make your payment before the next month’s statement is reported.
3. Age of Accounts
This is the point I brought up at the outset. Your age of accounts is an important aspect of your score. It shows your creditors how long you have been able to manage your credit responsibly.
If you have a few cards (I will explain later how the amount of cards matters too) that have been managed well for a long time, you will be less of a risk from the creditors’ viewpoint. It’s never a good idea to simply close cards that you feel you no longer use because that will only have a negative impact on your score.
Let’s say I have two cards that I have managed responsibly; one for 10 years and the other for 5 years. This means the average age of the two accounts is 7.5 years (10 years + 5 years). Now, if I close the card I had open for 10 years, it automatically drags the average age of my accounts down to 5 years, because it’s the only open account I now have… Makes sense? I hope so. If not, DM me on IG @evanleaphart
4. Derogatory marks
These pertain to anything that goes into collections such as a repossession or foreclosure. Having any of these derogatory marks on your report will cause your score to plummet. They can stay on your score for up to 7 years, making it very difficult to recover from them. So please AVOID THIS FROM HAPPENING AT ALL COSTS…
If you are close to purchasing a new vehicle or home and need to improve your credit score, contact a credit repair company. They can help you get some of these derogatory marks removed from your report, clearing the path for your proposed purchase.
Anytime that you seek out additional extension credit in the form of a new credit card, a loan, a mortgage, or a car loan, the creditor will do an inquiry on your credit report. There are two types of inquiries:
- A soft inquiry– Utility companies typically do soft inquiries, just to check your borrower history; it doesn’t impact your score.
- Hard inquiry– This is typically done by creditors and will affect your score. Hard inquiries stay on your credit report for 24 months, but only affect your score negatively for 12 months. Keeping your inquiries low is one way to maintain a better score. Actively seeking new credit will result in a larger number of inquiries. This indicates to the creditor that you’re probably biting off more than you can chew.
6. Total Accounts
Total accounts is a highly overlooked aspect of credit. Most people believe they should just have one or two credit cards and manage them well. But there is another side to the coin. If you can have multiple credit cards (10 or more) and manage them all responsibly, it can work wonders for you over time with creditors:
- It’s true that you’ll take a hit initially because you will have inquiries on your report and new credit (a low age of accounts). However, over time the inquiries will fade away and the average age of accounts will increase.
- When you have multiple open accounts, closing one will not have too much of a negative effect on your average age of accounts.
I hope these pointers help you understand a little more about our credit system and its workings. When you understand that credit is more than just a score, you can use it to your advantage and come up with your own financial strategy. Financial freedom is our only hope!
Peace and Love,