1. Payments History: 35%. As you can see, your payment history is number one factor that can make or break your credit file.
Simply put, when you pay your bills on time, you have nothing to worry about. Sounds logical, right? It is. But what if you are behind for one reason or another? The new FICO 9 scoring system that was adopted this summer, will lessen the weight of medical bills, small delinquencies, and paid off accounts on your credit score, but the basics, according to My FICO, remain the same. This is when your negative reports fall off your credit file.
Late payments: 7 years
Bankruptcies: 7 years for completed Chapter 13 bankruptcies and 10 years for Chapter 7 bankruptcies.
Foreclosures: 7 years
Collections: Generally, about 7 years, depending on the age of the debt being collected.
Public Record: Generally 7 years, although unpaid tax liens can remain indefinitely.
But other than that, are some delinquencies worse than others? As a rule, defaulting on a large loan like your mortgage will have more severe consequences for your credit history than defaulting on one of your credit cards.
The new FICO 9 scoring system will soften the hit your credit file gets from medical delinquencies, and it will give you an extra incentive to repay your debts (as it stands right now, you have no incentive to repay your debt unless the creditor agrees to take the derogatory mark off your file).
It will also take out the delinquencies that are smaller than $100. This makes the newest FICO credit scoring system very consumer-friendly--however, it's not in effect yet. It might take at least 2-3 more years until the banks change their software systems and begin utilizing the new scoring formula. You should never change your behavior just because the new credit scoring system has been announced.
2. The amounts you owe: 30%. This factor directly refers to Utilization Rate that we discussed a few months ago in this post.
Long story short: it's a terrible idea to max out your credit card! Banks don't like it, and new creditors like it even less. To them, maxing out your credit card might mean that you are either at the end of the rope or going there fast, and that extending you new credit would be extremely risky. Risky in banking terms doesn't necessarily mean that you won't get new credit, but that this new credit might come at a terrible, subprime interest rate cost. Remember all those 0% APR offers you used to receive in the mail? Well, banks will never give you the best possible terms when you are desperate.
But what if you are not maxed out? Is it a big deal if you utilize, say, 30% of your credit line? Yes, it is. First of all, if you habitually carry a balance, it's already a bad thing, but you probably know that. Second of all, when your creditor can see you near 30%, it sends the first signal to watch you more closely. Third, when you owe the bank that much, they have no incentive to give you a better deal on APR or to extend your credit line. They already own you.
FICO won't tell you exactly how much debt is OK, but this is no coincidence that, as a rule, people with excellent credit score have their utilization rate in one-digit number. Keep your utilization rate below 10% for each card and across all of your revolving accounts, and your credit score will thank you!
To be continued
This is a post by Andy Shuman, a credit and travel expert who blogs at www.Lazytravelers.net. He writes and blogs during and between trips that he enjoys free of charge mostly due to creative use of credit card offers. He believes that credit cards are much more than just a convenient way to pay for a purchase, and that the benefits of responsible credit habits can go far beyond getting the best rates for loans and mortgages.
Andy is the author of bestselling books from Lazy Traveler Handbook Series available on Amazon. When he's not traveling, he lives with his beautiful wife and daughter in Brooklyn, NY.
Questions? Suggestions? Keep them coming!
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