The Credit Clean up : What makes your Fico Credit score?
How to achieve a perfect credit score.
The average person does not know what their fico credit score consists of. There are myths that suggest that no debt equates to good credit but that is not always the case. There are various credit myths that can be misleading when starting your credit clean-up journey. In this article, I will review what your fico score consists of and how to create a plan to correct it.
Do you pay all of your bills on time every single time?
One late payment can make your fico score drop 20–100 points. Your one-time payment makes up 35% percent of your credit score. One late payment will remain on your credit report for up to 8 years. The sure way to fix a ding on your credit report is to continue to pay your bills on time. There are ways to improve your on-time payment ratio by putting bills under your name such as a credit card or utility bill.
Paying your bills on time isn't as cut-throat as you think, late payments are not reported to the credit bureaus until after they have reached 30–60 days past due depending on the lender. These creditors and lenders want you to pay your bill on time. If you think that you may be late on a payment call the lender and ask for a payment arrangement. They may charge you a small fee but that is better than a huge dip in your fico credit score.
How much do you owe? Do you know your debt to income ratio?
Your debt to income ratio will account for 30% of your fico score. A common pain point for most people is their credit card debt. It can be enticing to have a credit card limit of $5,000. When lenders view your credit report and see that your credit utilization is over 30% you can be seen as spread thin. These lenders do not want to lend money to individuals that aren't able to manage their debt. It is important to keep debt down and keep your utilization rate under 30%. The people with perfect credit tend to keep their utilization rate under 10%. It is great practice if your goal is a 750 fico score.
They are not much but they make a difference in the long run
The last parts that make up your fico score are your credit mix, new credit both 10% of your fico score, and length of credit history which is 15% of your Fico score.
Your credit mix is the type of debt that you have incurred. An example of a healthy credit mix includes a car payment, credit cards, and a mortgage payment. A healthy credit mix shows lenders that you are able to maintain a healthy relationship. It is not a deal-breaker but it looks good to have a mixture of the type of credit you have.
It is not good to open several credit accounts at once. If you can help it I suggest doing it over time. To lenders, you are seen as a risk if you are opening multiple credit cards at once.
Lastly, is your credit history. In general, long credit history can positively boost your fico score even if it's credit that you have not used in a while. Your fico score will take into account the average age on your account, how long your credit account has been established, and how long it's been since you used those credit account. Your fico score could take a dip from simply paying off a credit card and never using it again.
No debt, no credit
A major component of your fico score is understanding that if you have no debt you have no credit. Your fico score is how you manage your debt. A great goal is to pay off all debt but keep in mind not maintaining any type of healthy debt could hinder using credit account as leverage later.
Take the time to view your credit report and plan out what your next steps should be to improve your fico score. Your credit clean-up journey is not overnight and will take time and consistency.