As the New Year approaches, we’re all thinking about resolutions and goals. Before you dive in, consider reviewing your credit score. You may be asking, what goes into “good credit.” Let’s look at the five prongs that go into a credit score, starting from the lowest to the highest. So at 10% your credit mix.
- 10% Current Credit Mix: That’s the profile of your accounts: credit cards, student loans, auto loans, home loans, etc.
- 10% Inquiries: Multiple inquiries can damage your score because there’s the perception that you might be financially troubled. For example, if you’re applying for a mortgage and have four credit card inquiries and an auto loan inquiry, the underwriter might wonder if you’re going to have more debt that might affect your ability to repay. We wouldn’t worry about opening up one or two new store credit cards. However, going gangbusters and making five to 10 inquiries for new credit could affect your score.
- 15% Length of Credit: The longer you’ve had credit, the stronger your credit can become because you’ve proved a history of credit utilization.
- 30% Account Utilization and Balances: This is a really key part, and it’s one of the biggest pieces that people can work on: how much credit you’ve used relative to your available credit line. If you have a credit card with $1,000 limit and have an $800 balance, that’s going to be flagged on the report as a bit risky and will negatively affect your score. So, what can you do? Look at your limit and keep your balance at or below 30% of that credit limit for the account. At the 30% mark, typically your credit is going to report neutral. If you’re above 50%, your credit is going to report negatively on a monthly basis even if you’re paying that bill. Over time, it could affect your scores and bring them down into a less than positive range.
- 35% Payment History: Making sure you’re paying bills on time plays into that credit score. The payment history isn’t something that you can control retroactively, but your payment history does age. If you’ve had trouble making payments in the past and you’re able to get yourself back on track with making those payments on a monthly basis over time, your scores will improve.
Should I close my old credit cards?
You might think that by closing unused, old credit cards, you’d improve your credit score. Who cares about that Victoria’s Secret card from 15 years ago? Well, closing that can negatively affect your score because those old card could have positive payment histories or low utilization. They could sit there, behind the scenes, positively affecting your credit score.
What do the different levels of credit scores mean?
- Poor: Anything under 580.
- Decent: 580 to 660. Typically, for a mortgage, you’ll need above 620. Terms do get more competitive when you have a higher credit score because you’re a lesser risk.
- Good: 680 to 720.
- Very good: 720 to 780.
- Excellent: 780 to 850.
I’ve got credit cards, but what if I never use them?
Bad idea. It’s called “ghost credit” because you don’t have any payment history. Remember, you need to use credit to build it. If you’re new to credit or trying to reestablish credit, consider getting a credit card and use it just for purchases you need to make anyway and pay it off in full at the end of the month. That way you’re not paying interest but you’re building credit in a positive manner.
If you have any questions, your banker is here to help. We can help solidify your plans as well as help achieve your financial goals. In addition, we can help you plan for those life-changing situations or unexpected expenses.
Here’s to a Happy New Year!
Charlotte H. Green is Vice President, Residential Mortgage Sales Manager.