Five Critical Credit Criteria
1. Payment History
Your track record for paying your bills makes up 35% of your score. The largest factor is "paying your bills on time". While it is best to always pay your bills on or before the date that they are due, paying a bill a few days late and incurring a late charge will not necessarily go on your credit report. Having a "late" on your credit report means that specific account is 30 days or more past its due date. The more "lates" you have, the lower your score will go. If you have a bill that is 60, 90 or even 120 days late, your score will rapidly decrease. If you already have a "late" on your report, the more time that elapses between the date you were late and the present date the more your score will improve. The mortgage industry has two major thresholds when looking at any late payments on your report - 12 months, and 24 months. Each milestone will provide you with better financing solutions as your late payments fade with time. In addition, a mortgage "late" is much more serious than a credit card "late". So if it comes down to a choice of "which bill should you pay?" always choose your mortgage payment and never miss paying this one.
2. Credit Ratio
How much you owe is 30% of the score. You might think that if you owe less you will have a better score. Unfortunately that is not always true. This portion of your score is determined by a delicate 3-way dance between your types of credit (mortgage, car loans and credit cards), how much you owe, and how much you have available to you. Having too many credit cards can be a negative and so can having only one. Having a credit card with a large limit can be a good thing, as long as you are not near that limit. The same rule applies with a second mortgage or a home equity line of credit. When you have lots of credit available you want to make sure you "use" that credit but do not maintain a high balance. The closer your balance is to the maximum credit available to you, the lower your score will go.
3. Credit Type
The type of accounts you have makes up 10 % of the score. How much you owe (See #2) combined with what types of credit you have available make up the "art" side of the calculation.
4. Credit Maturity
How long you have maintained your individual credit accounts is another 15% of your score. Of course the longer you have had credit, the longer your track record will be, but another important factor is how long you have had a particular account. The longer a particular account is open and active the better your score will be, assuming of course no lates on that account.
5. New Credit
Your recent history makes up 10% of your score. Opening up a bunch of new accounts and playing the credit card "balanceswitching" game does not look good to the agencies. Muti notes that income, savings, age, race, geographic location or marital status are not considered in the calculations. "Basically, the score indicates your track record of making payments to companies you owe money."
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