The Impact of Having Old Credit History

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Typically, the longer a person has had credit, the higher credit score will be. A longer credit history provides more information to the lender on the long-term financial behavior of the person. Of course, this is assuming that they don’t have a history of late payments, delinquencies or maxed out balances.

To generate a credit report with a credit score, one should have at least one active account that has been existing for at least six months. You shouldn’t expect to get an 800-credit score if you’re new to credit, but you can achieve a credit score high enough to qualify for most credit cards and loans. Young adults have lower credit scores in general as they are just establishing their credit history.

How to preserve your credit age? Be careful about closing bad accounts, especially your oldest credit account. You might be tempted to close them due to delinquency reports but most of this negative information will fall off the credit report after seven years. The longer it is inactive, a closed account will impact your credit score less and less.

New credit

Applying for a new credit might temporarily affect your credit score. When a lender makes a hard credit inquiry – meaning you allow a lender to check your credit report – this will negatively impact your new credit score which accounts to 10% of your credit report. Lenders don’t want to see lots of hard credit inquiries which might indicate that the consumer is desperate for a loan or preparing for a big splurge.

Credit score providers, such as FICO, only takes into account hard inquiries and new credit lines for the past 12 months. It is therefore wise to open only two new credits in a year if you need to. If you plan to take a mortgage or buy a car, multiple inquiries for a car or mortgage loan is considered a single inquiry as long as you keep your search within 30 days.

Soft inquiry (also called soft pull), is when an institution pulls your record only for background checks, and usually without your approval. Unlike hard credit inquiry, soft pull doesn’t affect your credit score.

Credit mix

Credit mix – meaning the different type of credits you own (credit cards, mortgages, store accounts, installment loans) – makes up the last 10 percent of your score. Although quite vague, a person who has all sorts of credit and able to repay them indicates a more reliable and mature borrower.

The Bottom Line
If you are planning to make any big purchase that will require you to take out a loan, it is recommended to check your credit score six months in advance. This will give you time to correct any errors, if any, and improve your score. Despite the popular misconception that people with no or little income has poor credit score, this is just a myth. A person’s income has nothing to do with their credit score. The same way that age, race, religion, national origin, family obligations, children you have, your occupation, work or health history has NO effect on your credit score.

At the end of the day, if you manage your credit responsibly, you will be rewarded for good credit behavior.

Factors that Affect Credit Score

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How to stay on top then with your payment history? The most obvious one is to pay your bills consistently and on time. You can set up for autopay or set monthly reminders to not miss a due date because of busy schedule. Creditors may also adjust your due date if it would be better to suit your salary schedule.

Is there a way to remove late payments from the credit score? The answer is YES! If you and your creditor have a positive relationship, writing them a “goodwill letter” requesting to remove your late payment history might yield to positive result. You can also sign up to the lender’s auto pay facility and lender might consider to overlook the late payment (and won’t report it) since you are kind of giving them a guarantee of regular payment through auto pay.

Credit utilization

Credit utilization – also known as debt-to-limit – is the percentage of available credit that has been borrowed. It is calculated by dividing your balance on existing credit cards by your credit limits.

The main goal is to maintain low credit card balances and avoid hard credit inquiries. It doesn’t matter if you pay off your balances every month, in credit utilization, what’s more important is you don’t owe more than 15%–25% of your total available credit on any of your credit card at any point during your billing cycle. Although note that having $0 balance on your accounts will not guarantee a higher credit score. Lenders want to see if you are responsible and financially stable to pay back, but owing nothing means no history to check.

FICO, the biggest name in the country focused on credit scoring services, says people with the best credit scores tend to have a credit utilization ratio of less than 6%. Most of them have three credit cards carrying balances with less than $3,000 owed.

How to determine your credit card utilization ratio? First, add up all the balances on your cards. Second, add up all the credit limits on your cards. Finally, to get your credit utilization ratio, divide your total balances by your total credit limit.

Is there a way to improve credit utilization ratio to improve credit score? Opening another credit card might improve your credit utilization ratio. This strategy should be used in caution, though. A new credit card might in effect reduce the average age of your credit accounts and 15% of your credit score is based on your credit age. Another approach to improve credit utilization ratio is pay balances twice a month if you can afford it. Another option is to ask your credit card provider for a credit limit increase.

Length of credit history

With FICO, credit history or credit age affects 15% of the total credit score. With Vantage Score, credit age and types of credit are combined into a single factor that makes up to 30% of your credit score. Credit age is the length of time each account has been open and how long you have been using that credit. To establish a good credit history, it is said that you have to keep your accounts active for seven years.

The Lowdown on Credit Score

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A credit score is defined as a number, ranges from 300 to 850, used by lenders to determine the risk of loaning money to a given borrower. It represents the creditworthiness of an individual. Lenders such as auto dealers, credit card companies, and mortgage bankers will first check your credit score before deciding if they will accept or decline your application, how much they are willing to loan you and at what interest rate to give. Having an excellent credit score will guarantee loan approval and you will be in better position to negotiate your interest rates.

Your credit scores and credit reports can also be accessed by different organizations such as an insurance company or utility provider. Employers and landlords may also look at your credit score to see how financially responsible you are. Although it seems that everyone can have access to your credit scores, report is only given to institutions with legitimate need of it.

A credit bureau is an entity that collects credit data from various creditors and provide this information to a consumer reporting agency. The three major credit bureaus in America are Experian, Equifax, and TransUnion. FICO (Fair, Isaac and Company), a consumer reporting agency, and its scoring system is the widely used (90% as per their website) by top lenders in the U.S.

“Pay your bills on time.” A financial mantra that sounds easy enough to follow but when life throws you lemons, personal finances get put on the back burner.

Your payment history comprises 35 percent of the total credit score and the most important component that can affect your credit score calculations. Lenders want to see your long-term past behavior on bill payments and the biggest determining factor if you can be trusted to repay funds that are loaned to you. Obviously, a person who has history of bad debts or late payments will have a tougher chance getting a new loan with competitive rates compared to someone who never miss paying.

Payment histories considered are both for revolving loans such as credit cards, and installment loans such as mortgages or student loans. Paying late definitely affects your score and the later you pay – 30, 60 or 90 days after due date, the worse it is for your scores. If any of your accounts has been sent to creditors, that raises a big flag to lenders that you can’t keep up with your bills.