How to maintain healthy credit

I want to give you the basics of credit scoring and how to maintain healthy credit.

Your credit score or FICO score is based on a computer model. All 3 credit bureaus currently use a variation of the FICO model.

Payment History - 35% of your score

Pay your bills on time! This is the biggest portion of your credit score. If your minimum payment is $35 on a credit card, pay at least $35 on time. You can pay more later if need be. Your creditors will report you when you are 30, 60, 90 or 120 days late. The longer the late payment and the more recent, the harder it hits your score. This is just plain common sense.

Outstanding Credit Balances - 30% of your score

This part is not completely obvious but your credit score will be higher if you keep a lower balance on your revolving credit such as credit cards and store cards etc. Your credit score will be helped the most if you keep it at 0% to 30% of the limit. If you carry a balance between 30% and 50% of the limit, it won't be helping your score, but it won't be helping it either. Once you get above 50% usage on any revolving debt, it starts to bring your score down. Installment loans (car loans, mortgages etc.) are not looked at in the same way.

The bottom line here is that if you have a credit card with $1,000 limit and you owe $980, you can help your score a bit by paying it down below $500 and you can really boost your score by paying it down below $300 balance.

So..... when you have 5 cards with a $10,000 limit on each of them and you owe $2,000 on each card, you are better off than if you consolidate them to 1 card and use the entire credit balance on that card. If you have a lot of cards and a long credit history, this will hurt you less than if you only have a few credit cards.

Credit History - 15% of your score

As a general rule, don't close those credit cards. How long you have had your cards does affect your score. Car loans look better when they are paid in full. If you get a 60 month car loan and pay it off in 6 months it doesn't help you much. If you have a long term credit account that is open and you just don't use it that much, keep it open anyway, it will help your credit score.

Type of Credit - 10% of your score

Having a healthy mix of credit does help your score. Credit cards really drive the credit score but car loans, mortgages add to the depth of your credit. One type of credit which is basically frowned upon by the scoring model are finance companies.

Finance companies usually are high interest, high risk loans like a personal line of credit with no collateral. You want to try and avoid finance companies if you can. Sometimes you are getting credit from a finance company without knowing it. If you want to buy something with "NO PAYMENTS FOR 12 MONTHS!" that is usually a finance company. Smaller store cards like electronics stores and jewelery stores are usually finance company credit cards. Larger store cards are OK like Macy's and Sears and Nordstroms. Again, if you have a long history and a lot of good credit, taking advantage of a 12 month no interest transaction or an instant 10% off while shopping may not hurt you. Just think before you apply for credit.

Inquiries into your credit - 10% of your score

Inquiries seem to be the hot button these days. Everyone seems to be learning that too many inquiries can hurt your credit and that is true to a certain extent. If you go to 8 car dealers and let all 8 run your credit then it will negatively affect your credit score. Just think before you apply for credit. If you are lloking into getting a mortgage, then you are allowed multiple "mortgage" inquiries within 30 days to count as 1 single inquiry. It seems likely that you will get only 1 mortgage. It seems likely that you would only get 1 car too...... The maximum number of inquiries that count against your score is 10 within a 6 month period. Any more than 10 just don't count.

Those pre-approved offers you get in the mailbox have looked at your credit but it does not count as an inquiry until you ask for that credit and then they will run your credit again and this time it is a "hard" inquiry. Also, when you pull your own credit, this is known as a self inquiry and does not count against you either.

General notes and things to think about:

Bad credit will show for a period of 7 years on your credit report.

A bankruptcy will negatively impact your credit score and will stay on your record for 10 years before dropping off.

Collection accounts will hurt your score. They hurt more if they are 1-6 months old. Less if they are 7-12 months old and still less when they are 13-24 months old. They really have a small impact afetr they are over 24 months old (even if there is a balance) BUT!..... if you pay off an old collection, that is looked at as new activity and it will actuallly hurt your credit score. Once the collection is paid off, your score will rebound more quickly than if it had not been paid.