How’s your credit score lately? There are a lot of myths out there about what affects your credit score; let’s look at what really matters.
The most important thing you can do is make your payments on time. This accounts for 35 percent of your overall score. If you are late with one payment, it will lower your score, but potential lenders will look at your overall debt repayment history.
RumboughNext in line is your debt-to-limit ratio, which accounts for 30 percent of your score. How many credit cards do you have and what is their limit? Having a lot of credit available, and having several cards that are close to their borrowing limit, will negatively affect your score. However, be careful not to cancel all your credit cards. Remember, they look at overall credit limits and amount actually borrowed. If you cancel cards that have zero balances, you just lowered your debt-to-limit ratio, and your credit score. When should you cancel cards? When you can’t resist the temptation to use them without paying off the balance each month. In this case, it is better to lower your borrowing limit than to risk not being able to pay your balance.
Credit history accounts for about 15 percent of your overall score. Many college graduates run into this problem, because it’s not about bad credit, it’s about no credit. Establishing credit history can be as simple as opening a small account at a local retailer, making purchases regularly, and paying off the balance each month. A potential lender will favor a few well-managed accounts over a long history of missed payments. Be careful, however, about trying to establish a lot of credit too quickly. Ten percent of your score has to do with how frequently a borrower applies for accounts. So, just like trying to get a whole summer’s tan in one weekend doesn’t work, neither does getting all your credit established at one time.
Finally, the mix of credit determines 10 percent of your score. Credit types range from mortgages, to auto loans, to credit cards and other credit types. The bottom line: Take time to improve your credit by paying your bills on time before applying for more.
– Rumbough, CPA, CFP, is chief operations officer with the Baptist Foundation of South Carolina. Contact her at 800-723-7242. In accordance with IRS Circular 230, any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.