Everyone wants to have good credit. If cash is king, then credit is queen! Life becomes a lot easier if you have a good supply of both! But when something happens and you find yourself with a less than desirable credit score, it weighs heavy on your mind how to get your good credit back!
But in order to do so, you first need to know how your credit score is calculated.
Your credit score is totaled based on five major categories:
- 35% your payment history
- 30% your outstanding debt
- 15% how long you have had credit
- 10% new credit you are building
- 10% TYPES of credit you have (ex: installment, real estate, revolving)
Your Payment History
Obviously, if you are not a good payer, you will have a lot of negative items showing up on your credit report. Unfortunately, HOW you pay is the biggest factor to your credit score.
Late payments: These can effect your credit score based on the following factors:
- How frequently do you pay late?
- How late is it?
- How recent is it?
Keep in mind each credit reporting agency treats late payments differently. But in general, the longer a debt goes unpaid, the bigger the impact on your credit score. Also the more recent it is, the bigger the impact. So even if you have a 90 day late but its a year old, its impact has been lessened by time. Although it still sends a clear signal to creditors that there could be some risk in lending to you.
According to an article I read on Equifax’s blog. People with good credit will see a BIGGER hit to their credit then those who have a few late payments on their credit score. For example, a person with a 780 credit score who gets hit with a 90 to 120 point drop with a 30 day delinquency!
The big drop
What I took away from this is that we all make mistakes and the 90 – 120 point drop on someone with a 780 will still leave them with good / average credit. Also if it was me, I would call the company reporting the late payment and ask for it to be removed. And if you have a good history with the company. They will do it.
But if someone has avg/good credit and gets hit with a 60 – 80 point drop. They definitely drop into the poor / bad credit range.
Conclusion, paying late on your debts defeats any credit repair efforts you are making. if you routinely pay late, they are unlikely to help you by removing the negative item.
To avoid late payments, set up automatic bill pay for the minimum amount. That way you never have to worry about it. But also get in the practice of paying more, if you have it. You will be paying forever, if you only pay the minimum amount due!
Not all negative items will effect your credit score the same. When you default on something big like your mortgage, you will see a big drop. Nevertheless, although you usually try your best to pay on time, there may be instances when you are forced to delay on your payments. When this happens, make sure that you get in touch with your creditors right away. If you think you can’t pay off your debt within that 30 day limit, try to make an arrangement with your creditor.
Your debt utilization is another big factor in calculating your credit score. Most consumers know what their credit score is, or can guess. But they have no idea that there is also a bankruptcy risk score. And guess what your bankruptcy risk score is based on? If you guessed your credit utilization, you are 100% correct! The more outstanding debt (especially if its credit card debt) you have, the more likely you will be forced into bankruptcy. ESPECIALLY, The debts you owe will determine whether you are a high risk borrower or not. If you are in the habit of maxing out your credit limit, then creditors will automatically regard you as high risk. Ideally, borrowers should never go beyond 30%-40% of their allowable credit.
Your Payment History
How long you’ve had credit also plays a role in your credit report. That is why it is very important to establish credit as early as possible. It adds up to your credibility as a borrower. This is also the reason why you should never close your account from your old credit cards even when you don’t use frequently use them. If your old credit cards come with high interest, use them occasionally to buy inexpensive items just to keep them from automatically closing out.
Types of Your Credit
Whether you have credit card accounts, car loans or mortgage loans also affect your credit score. A mortgage loan can increase your credit standing because it is considered as debt that appreciates in value over time. Nonetheless, keep in mind that it will only boost your credit if you are able to keep up with your mortgage.
How you manage your new credit is just as important. Remember that each time you submit a credit application, a new inquiry is made on your credit history. Too many inquiries can lower down your credit score. Refused credit applications can also be a red flag in your report. To avoid damaging your credit, send an application only if you really plan on obtaining it.