Improving your credit score is possible
The FICO Score scale runs from 300 to 850. How rare is a perfect credit score of 850? According to Fair Isaac Co., the developer of the FICO Score, just one in nine Americans has a FICO Score of 800 or higher, and only 1% have a perfect credit score of 850.
A credit score of 800 or higher is actually a lot easier to achieve than you think. There are five relatively simple, disciplined strategies to follow that will improve your score. Discipline is the key ingredient. Spending within your means is possible. You have to determine your goal (home ownership), plan your strategy (steps 1-5), then execute your plan.
- Pay on time
Paying bills on time accounts for 35% of your FICO Score. This should be a habit and is the biggest component to achieving a perfect credit score. Discipline with your payments demonstrates to lenders that you can be trusted with future loans. Lenders will want to see a minimum of 12 months with no late payments.
Consumers should also understand that if a late payment is more of an exception than a rule, your lender may be willing to forgive it. Late-payment forgiveness is all dependent on the lender in question, but most companies will allow a late payment once every 12 to 24 months without any negative repercussions. You will be required to explain the late payment when applying for a mortgage loan.
- Mind your credit utilization rates
Credit utilization comprises 30% of your FICO Score. In other words, your credit card may have a $5,000 limit. If the balance you owe is $500, your utilization rate is 10%. That shows you are doing a really good job in being disciplined in your spending habits. The lower the utilization rate, the better.
Credit bureaus are like to see utilization rates under 30%. Over 30% indicates that you either don’t have good money management skills, or that you may have difficulty repaying your debts.
- Have a good mix of accounts
Your credit mix accounts for 10% of your FICO Score. Just as creditors want to see that you can make on-time payments, and that you can keep from utilizing too much of your available credit, they also want to observe your ability to handle different types of credit accounts.
For example, credit agencies are looking for consumers that have a good mix of installment loans, such as a mortgage, car loan, or student loan, and revolving credit, like a department store credit card or bank credit card. If you can handle a good mix of debt obligations, creditors are more likely to lend to you, and your FICO Score is liable to benefit.
- Keep your accounts for at least 5 years
Average credit age accounts for 15% of your FICO Score and a minimum of five years should be the goal when aiming for a high score. Your credit score should receive a big boost by keeping your good-standing accounts open for long periods of time.
Both your lenders and credit reporting agencies examine your account history as a roadmap to your credit worthiness. If you have a perfect payment history, but just six months’ worth of credit history, lenders may still have reservations about your ability to meet your debt obligations. However, if your average good-standing credit account has been open for five years, you’ve demonstrated to creditors and the credit agencies that you’re quite trustworthy.
A word to the wise here is not to close long-standing credit accounts, even if you don’t use them often, and assuming annual fees aren’t a hindrance. Long-tenured accounts can provide a big boost to your average length of credit history, which is one of the factors that affects your credit score. Make an effort to use all of your credit lines a couple of times a year in order to keep them active and in good standing.
- Be mindful of opening new accounts
New credit inquiries comprise 10% of your FICO Score. While credit bureaus want to observe your ability to manage multiple types of credit accounts, you’ll also want to be careful not to open too many accounts.
The easiest thing to do is ask yourself if a credit account is necessary based on your purchase. If you’re buying a home, a car, getting a college education, or even buying a new washer and dryer for your home, opening a line of credit probably makes sense as these are large-money events. If you’re buying an item for $20 at your local department store, you should forego opening a new account to save 10%. The department store will do a hard pull on your credit which will knock down your score a few points.
However, if your are in the process of buying a home, DO NOT PURCHASE ANY LARGE ITEMS OR OPEN ANY LINES OF CREDIT. Doing so could sink your loan.
If you follow these simple strategies, remain disciplined, and give it some time, you can improve your score in a relatively short amount of time.
Call Multiline Mortgage Services. We can move very quickly on getting you the right loan at the best price.