Believe it or not, it’s not very difficult to identify the components that affect your FICO credit score. This information is widely available. In addition, it shouldn’t surprise you that some components carry more weight than others. But what matters most is what you do with this knowledge. You have to apply it. Below are the elements that make up your FICO score and how much they influence it. Here they are at a glance:
Yellow Wealth Belt (YWB)
% of Influence
|Length of credit history||
|New credit and inquiries||
|Type of credit used||
What you should get from the above chart is that the higher the percentage of influence, the more attention you should place on keeping that area of your financial life spotless. Here’s how to do that while raising your score:
1. Payment history (35%)
The major payment types are credit cards, mortgages, installment loans, retail credit, and any other type of financing. Creditors want to know if you pay on time or late, went through a bankruptcy or foreclosure, have any lawsuits, liens, collections, etc. To keep this area clean:
- Pay bills on time. If possible, arrange for your bills to be automatically paid from your bank account on a set day every month.
- Negotiate and settle any outstanding collections, if the collection agency agrees to take it off your credit report.
- Don’t rush off and start closing accounts. Doing this hastily could actually harm your credit score. For now, just stop using the accounts you were thinking of closing.
2. Amounts owed (30%)
The focus here is on how much credit and debt you’re carrying, how many accounts you have open, what kind of debt you have, etc. To keep this area sparkling:
- Don’t maintain balances that approach the credit limit for the card or account. Try to keep your outstanding balances on credit cards and revolving accounts below 40% of your total credit limit.
- Pay off your credit cards faster, but not 100% every month. You want creditors to see a history of you paying your bills each month, on time, over reasonable periods of time. Be sure your monthly payment is more than the required minimum.
- Don’t open new accounts if you already have plenty of them.
3. Length of credit history (15%)
Creditors like to see a reasonable amount of credit history. So they check to see when accounts were opened and what the activity has been like. Having very little or no history can hurt you as well. To keep this area immaculate:
- Don’t open lots of accounts in a short period of time. Make sure that you’ve created a good history with existing accounts.
- Stay away from bad credit neighborhoods. This would include payday loan providers, consumer finance companies, and others that make their money by taking advantage of people in financial trouble.
4. New credit and inquiries (10%)
Creditors check to see if you’ve recently opened an unusual number of new accounts and had a lot of inquiries. This could be a sign of financial troubles or you’re taking on too much credit too quickly. Also, an excessive number of inquiries can hurt your score. To keep this area crisp:
- Don’t apply for lots of new credit. Before you complete a creditor’s application, which then allows them to run your credit report, make sure you’ve decided to do business with them.
Ninja Secret: If you’re just shopping around for a new home, car or whatever, you can let potential creditors take a glance at one of the recent FREE credit reports you’ve obtained. This will suffice for casual discussions about prices, interest rates, and terms.
5. Type of credit used (10%)
Creditors take a look at the mix of credit types you’re using. Is it heavily weighted toward retail credit cards, for example? To keep this area spotless:
- Try limiting your credit to 5 or 6 credit cards, a few active installment accounts (e.g., car and furniture financing), plus a mortgage.
In conclusion, your credit history can have a profound effect on your life and finances. You’ll pay less for things that you want and be in a much better position to build wealth. So make it a priority to get this aspect of your life in order by doing the following:
- Review the credit score boosters and apply them to your personal finances. Focus first on the areas with the greatest amount of influence.
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