Consider these five factors when trying to improve your credit score…
Payment History
Payment History has a 35% impact. Paying debt on time and in full has a positive impact, and late payments, judgments and charge-offs have a negative impact. Never pay off a collection or charge-off just before applying for a loan. If you’re going to pay them off, do it at least 90 days (or more) before applying for a loan or make it a condition of being paid off upon the closing of the loan.
Credit Balances
Outstanding Credit Balances have a 30% impact. Your ratio of outstanding balance to available credit is important. Keeping that below 30% is wise. It is never a good idea to close an account; the debt ratio will go up and the number of seasoned lines will decrease. Pay outstanding debt down as close to zero as possible and evenly redistribute the remaining balance among the open lines. If you DO redistribute among other credit accounts, do it at least 30 days before applying for any loan (60 days is better).
Credit Depth
Length of Credit History has a 15% impact. The length of time a particular credit line has been opened is important. A seasoned borrower is stronger. Opening new credit cards will decrease the average length, and therefore it will hurt this portion of the score. Closing a credit card that you’ve had for a long time will also decrease the average length, so don’t do it if you’re applying for a loan soon.
Credit Diversity
Type of Credit has a 10% impact. A mix of auto loans, credit cards and mortgages is positive, rather than a concentration in credit cards only. Also, having 3 credit cards is optimal. Less or more cards will only bring your score down.
Inquiries
Inquiries have a 10% impact. Hard inquiries for credit will negatively impact the score. Auto and mortgage inquiries are more forgiving. Up to 20 inquiries can be made in a 14-day period and will be treated as only 1 inquiry. The maximum number of inquiries that will reduce the score is 10. Any inquiries beyond that in a six-month period will have no further impact on the borrower. Each hard inquiry can cost 2-50 points on a credit score.
For a deep dive into how to quickly improve your credit scores, check out this article.
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