Credit Repair » credit score

Myth 3: You Don’t Have to Use Credit to Get a Good Credit Score

Steve — Sun, 24 May 2009 17:06:54 +0000

Some people are so suspicious of credit that they advise giving up credit cards and living on a cash-only basis. They acknowledge that most people need mortgages and auto loans, but they feel the best way to impress a lender is by living a credit-free life.

The credit-scoring formula is designed to judge how well you handle credit over time. If you have no credit, or you don’t at least occasionally use the credit you have, the formula won’t have enough information to make an assessment. You don’t have to live in debt to get a decent score, but you do need to use credit.

In the past, some people were able to get high credit scores without having much credit. Earlier incarnations of the FICO credit score gave scores over 700 to some people with just one or two recently opened accounts. The newer versions of the formula, however, make it much tougher to get a lofty score if you have a thin credit history.

You probably need to be concerned about your score even if you have no plans to take out loans. Now that insurers are using credit information for underwriting and rating decisions, your failure to maintain a credit history could cost you in the form of higher premiums.

It’s too bad that conscientious people who simply don’t like debt should be punished with higher premiums, and some states have even banned insurers from using a lack of credit history as a reason to raise rates. If your state hasn’t prohibited the practice, though, you might want to dust off your credit card and use it once in awhile.

Don’t Close Credit Cards or Other Revolving Accounts

Steve — Fri, 22 May 2009 07:26:45 +0000

If your goal is to improve your credit score, don’t close any of your current accounts. Closing credit cards and other revolving accounts can never help your score, and it might actually hurt it. Shutting down accounts reduces your total available credit, and that makes your balances loom larger. That narrowing of the gap between the credit you’re using and the total credit available to you is one of the things that can hurt your score.

Closing older accounts can also hurt you, because the formula notes both the age of your oldest account and the average age of all your accounts. It’s particularly important to keep your oldest account active, because shutting it could make your credit history look years younger than it actually is-and your score could drop as a result.

It may not be enough, by the way, to keep your oldest credit card in a drawer. If you don’t charge something occasionally, your lender could decide the inactive account is more trouble than it’s worth and close it for you. To keep it active, you might want to charge some small, recurring bill to the card-a magazine subscription, your gym membership dues-and arrange to have the balance paid off automatically each month.

How is your FICO score determined?

Steve — Fri, 22 May 2009 02:37:55 +0000

It is difficult to judge exactly how much an action is going to affect your FICO score and it will vary among different people with different credit profiles. Not one piece of information or factor alone in your credit report will determine your score. Your FICO score only looks at information in your credit report. However, lenders look at many things when making a decision including; income, employment history, etc.

We are able to sort the data within a person’s credit profile into five categories; Payment History, Amounts owed, Length of Credit History, New Credit and Types of Credit used. The percenteges in the image below pertain to the general population. For some groups, such as people who have not been using credit long, the importance of these categories will vary. Payment History:

Account payment info on specific types of accounts such as credit cards, mortgage, installment loans, etc.
Severity of delinquency
Amount past due on delinquent accounts
Presence of adverse public records such as bankruptcy, liens, etc.
Number of accounts paid as agreed
Number of past due items on file
Time since past due items, adverse public records or collection items

Amounts owed:

Amount owing on accounts
Number of accounts with balances
Amount owing on specific types of accounts
Proportion of installment loan amounts still owing compared to original loan amount

Length of Credit History:

Time since accounts opened
Time sine account activity

New Credit:

Number of recent credit inquiries
Number of recently opened accounts
Time since credit inquiry

Types of Credit Used

Number of various types of accounts