The only fact about what makes a good credit score is that no one actually knows how it is calculated. While the formula is seemingly top secret, there is at least agreement between experts as to what attributes of a credit report lead to higher credit scores. Here is a list of important credit attributes that we believe will lead to a higher credit score.
Long history of credit
The longer your history of credit the better your credit score will be. This is also known as established credit, and it applies to both the length of time that you’ve had credit and to the length of time you’ve had individual credit accounts. For example, you may have had credit since you got your first credit card when you were 18. However, you may have gotten rid of that credit card when you were twenty five and found a new one. Assume you are 30, you would have 12 years of total credit history and only 5 years of history on your credit card. Good credit scores look for both of these figures to be high. They want to see that you have managed credit for a long time without any mistakes, and they want to see that you are are low turnover risk. In other words, if you keep your accounts longer a creditor sees you as a lower risk.
Lots of available credit
Generally speaking, the more available credit you have the higher your credit score will be. Lenders like to see that lots of other creditors have given you credit, as it makes you a better credit risk and hence raises your score. With that said, any significant new credit on your account will likely lower your score in the near term. That’s because lenders are afraid that you are trying to get credit from multiple sources and, hence, you become a bigger risk in their eyes. However, as the new credit accounts become established, your score will rise again. There is also a point where you are deemed to have too much available credit. We’re not sure about this one, but we’ve read that having too much credit can scare off lenders, especially if they deem that you have more credit available than you could potentially pay off.
Several sources of credit
The more variety of accounts that you have on your credit report, the higher your score will be. Lenders look to see that you are not only responsible with your credit card accounts, but want to see that you can handle several different debts at the same time. For example, having a mortgage, a few credit cards and an auto loan or two, would be better than just having credit card accounts.
Low percent of available credit used
There is a secret number that creditors look for when it comes to the percent of your available credit used. We believe the number is less than 50% and more than 20%, but we’re not really sure. For example, if you have 5 credit cards, each with $10,000 credit limit, then you have $50,000 in available credit. You’ll want to use some of this available credit but not too much. The closer you get to using the full $50,000 in available credit, the lower your score will go.
Keep a few accounts active
As you use your credit accounts, they are updated with the credit reporting agency. If you have a lot of accounts but don’t use any of them, they become effectively inactive on your credit report, as the last date paid is one of the stats on your credit card account that is shown on your report. Make sure you use your credit cards periodically, even if it is just to buy groceries or something mundane. Keeping your accounts somewhat active can help your score. After all, your creditors want to make sure that you can handle and manage your accounts. If it looks like you aren’t using your accounts, you will be percieved as a higher credit risk.
No late payments, charge offs or delinquincies
We shouldn’t have to state this, but it is a well known fact that any type of negative on your credit report will greatly decrease your credit score. Make sure you make all of your payments on time and if you have a dispute with any creditor, whether its a hospital bill, a credit card company, or cell phone provider. Make sure you work something out before it affects your credit. Personally, my wife withheld payment for verified fraud on her credit card account that was mistakenly reclassified as payable again. Out of principal, we refused to pay and, sure enough, my wife couldn’t even get a store credit card for a few years. Even hiring two different lawyers couldn’t get the bank to make a change. Finally, some new laws were passed that put the burden of proof on the bank. However, the charges remained on the account for years. They are supposed to disappear after 5 years, but they were passed on to so many debt collection companies, and each time a new debt collector called, the account was updated on the credit report and it lasted for over ten years! Our advice, if you have any negatives on your credit report that are not your fault, is to find a competent credit counselor or to do all the research yourself and fix it as soon as you can. If you have charges that are your fault, you should still do your research and work with the creditor to pay off some or all of your account in return for clearing your credit. Debt counselors can be inexpensive and help out with the negotiations on your behalf, but be very careful choosing as there are tens of thousands of fraudulent websites out there trying to scare you into buying their “services”.