You and your credit (3 of 4) – The major factors influencing score
Continued from You and your credit (2 of 4) – Credit score fundamentals
In the last installment, we outlined the components that determine your credit score. These are all elements that you have control over. It’s important to realize that just two of them are responsible for nearly two-thirds of your entire FICO score, and these two can be the easiest (but sometimes the hardest) to manage.
35% of your credit score is determined by the punctuality of your payment activity. The easy way to prevent this from negatively impacting your score is to simply pay your creditors on time. All the time.
I understand that this isn’t always easy. Unemployment, medical bills, and other unforeseen financial burdens can certainly lead to ruinous circumstances. However, if you’re able to make minimum payments until a crisis is over, you’re going to save yourself in the long run by maintaining a decent score rather than having to rebuild your financial reputation. If it means “robbing (borrowing from) Peter to pay Paul”, in other words, using another source to cover a payment or two, it might prove beneficial in the long run. Of course, having a savings stashed somewhere for such emergency situations is vital; we’ll discuss this more when we touch on budgeting another time.
Your creditors are not supposed to report late payment activity to the bureaus unless a payment is at least 30 days late. Now that certainly doesn’t mean that you should postpone paying your bills for four weeks, but it does mean that it’s not the end of the world (as far as your credit score goes) if you accidentally drop your mortgage or car payment in the mail a couple of days or a week behind schedule. This of course does not take into account any other late payment provisions/penalties you may have – credit cards usually love to tack on juicy late charges as soon as they’re allowed to.
There are different notations for a payment that is 30, 60, or 90 days late and unpaid/missed payments as well. It makes sense that the longer you go, the worse the penalty could be. No one can tell you if a single 30-day late payment is going to reduce your score by two points or 20, but avoiding them altogether makes for an easy way to maintain a respectable score.
Another 30% of your overall score is calculated by what is known as utilization. This only applies to your revolving accounts (major credit cards and possibly store credit cards). It is an easy concept – basically, if you have a $1000 limit on your Visa card and you only have $500 available (meaning you also have a $500 balance) then you are at a 50% utilization for that card.
A lender wants to see a low utilization rate on every revolving credit account on your record. This tells them that even though you have available credit, you have the self-control to not run amok with it and live at your maximum debt capacity. The magic number of what’s considered a low utilization is generally 30%. This means, keeping your balances at 30% or less than your total available credit per card is vital. Read that again and make sure you understand that it is on a per card basis:
Bad Scenario: You have three revolving accounts with $1000 limits each. You have a $900 debt on one card and $0 balance on the other two. This is a 90% utilization on the one card, and even with 0% utilization on the other, this will have a negative impact on your credit score.
Good Scenario: You have three revolving accounts with $1000 limits each. You have a $900 debt, but it’s spread out evenly on all three cards – $300 each. This is a 30% utilization on each card and is much better than having any of your utilizations higher.
Make sense? You may be tempted to put all your charges onto one card – maybe that special card has better interest rates for lower finance charges, or perhaps it gets triple rewards points you can use toward merchandise or vacations, etc. Even if you pay the bill off in full each month, this can still be bad if your score is tallied while the bill is still unpaid.
These utilization percentages only impact your score at the time it is being pulled. If you’re going for an important loan where your score will play a major role in determining your interest rate (or even if you’ll get the loan at all), you’ll want to ensure your utilizations are nice and low on all revolving accounts. Be sure to do this ahead of time as it may take up to 30 days for a creditor to report your balances to the bureaus.
Ok, this covers the two major factors that can have an impact on your all-important credit score. In the next section we’ll discuss the remaining factors and what to do to help prevent the pitfalls of fraud and identity theft.
