It seems like in credit repair we always focus on the negative, but don’t talk enough about the positive. So, what is there to love about your credit? Let’s talk positive credit.
Building the right kind of credit can be one of the most important things you can do for your credit. What is the right kind? We like to see a good mix of credit between both revolving and installment. The ideal ratio is three revolving to one installment loan. That’s not to say that if you have three revolving and no installment you need to go open an installment loan, this is just a preferable ratio.
The most important type is revolving credit or credit cards. Revolving credit makes up 30% of your credit score in mortgage credit scoring model. If you do not have any revolving or credit cards, you do not score in this section. This could be a huge detriment to your credit score in losing out on 30% of the model.
Revolving credit is scored based on the utilization of the credit card. Utilization is the percentage between the limit and the balance. The lower the utilization percentage score the more points that particular credit card will contribute towards your credit score. The higher the utilization percentage score the fewer the points are contributed towards your credit score. So needless to say, the goal is to keep your credit card balances low. How low? Ideally 20% to 30% is best for maximizing the points contributed to your credit score.
What about installment loans? They can be important as well of course. The type of loan can matter, for example a mortgage loan is much better than a financial loan from the bank. 10% of your credit score is the type of credit. This is where the type of loan matters. In fact, too many financial loans can hurt you… but we aren’t talking about the negative, only things we love about credit.
What else is there to love about credit? How about credit history. It might go without saying that the longer an account is open the more it helps. Your credit history is 15% of your credit score and it is an average of your open and active accounts both installment and revolving. Sometimes credit cards can be your best asset for lengthening your credit history. Credit cards, unlike installment loans, do not have a term. Also, depth of credit is important, so having a few credit cards that have been open for several years, helps add depth and good history to your credit. Authorized users can help as well in adding length to your credit history. Authorized user accounts report the same for the authorized user as it does for the card holder.
So, what do we love about credit? The right types of credit and having lots of history. Simple right? Perhaps not, this is where a credit coach can come in and help. Contact us today to set up a consultation to review your credit file.
