I get a lot of questions related to credit and how the “little black box” of credit scoring works so I have put together a series that helps to shed light on just how the scoring models used by Equifax, Trans Union and Experian work.
Types of Credit – 10%
This 10% of your score is made up of criteria where almost nobody has a correct idea on what to do. If you have ever heard those incorrect statements such as: You should have at least three credit cards. American Express is a great revolving account. Or my favorite, you should have a 1 to 1 ratio between revolving and installment accounts (this would mean my sister, who at one point had every store card known to mankind and would need to buy up half the real-estate in town to keep up her calculation requirements), this section is for you.
The best score is certainly not about quantity but rather quality. Ideally, you want to have one account in every category. I’m not just talking about Revolving, Installment and Other either. Installment accounts can be broken down further than that. A close to perfect mix is going to be a credit card (R), an automobile loan (Auto), a mortgage loan (MTG), a student loan (I), and an “other loan” like American Express (O). American Express that has no limit and is considered an “Other” account, not revolving as one might assume, as it has no limit to calculate its utilization.
The reasoning behind all this is to show you can carry a variety of loans (shows responsibility) but not too much of any one kind (too much risk). This doesn’t mean you should start opening and closing your loans left and right to try to get this mixture correct. If you do, all of the other sections are going to be impacted just as much, which could be good or very bad. However, to receive guidance, you certainly may want to just have your personal credit scenario evaluated. Contact firstname.lastname@example.org or 404-432-6699 for a complimentary consultation.
Length of Credit History- (Makes up 15% of your credit scores):
Most loop holes one tends to find when trying to maximize their positive credit end up being loop holes of fire and trickery that tend to leave you scorched when going through them. There are, however, a few “they” haven’t gotten around to reverse on us yet. Three of them happen to be located in the length of credit history section of your credit score. The question is, how can I gain more credit history without time just slipping away and my credit score crawling up at snail’s pace?
First of all, and I can’t stress this enough, please don’t exercise these options on your own without first having your credit profile evaluated. One positive adjustment in one of these sections of the credit score can often affect multiple other areas in each unique circumstance. To begin, if your length of credit history is calculated by the average time on open active accounts, you can close a revolving account assuming you have more than one and the one you are closing has less credit history than your average (once again the math has to be done because your payment history, amounts owed and types of credit will also be affected when doing this). Another option would be to inherit a revolving account from someone close to you, effectively photocopying their trade line on to your report (there are many pros and cons to this so ask if you want more information). Lastly, if there is a deferred student loan available (or many), it is feasible to remove the oldest and most affordable out of deferment and gain credit history from the very beginning when the account was opened (largest warning on this as it pertains to qualifying or future qualifying for a mortgage is this strategy will increase your monthly debt and thus your DTI which does have a limit as it pertains to guidelines for the loan product you are seeking).