After eight years in the credit counseling and repair industry I’ve continuously found that lenders, professionals and consumers alike have determined credit to be intimidating. No one seems to know how credit is calculated for scoring. It seems like a “crazy” field that can’t be navigated.
Allow me to make it simple for you.
Your scores are calculated based on a number of factors. Below is a list of what you should show in order to obtain scores in the high 700s.
1) Three to five open active credit cards with a combined limit minimum of $10,000. Do not have less than three do not have more than five. Less than three shows a limited access and more than five shows the inability to commit. Yes, just like relationships you are judged on your experience and ability to commit.
2) The longer your credit history the higher your scores. If you are in your 20’s a 640-680 is wonderful and expected. If you are in your 30’s you should be at a 680-740. If you are in your 40’s you should be a 740+.
3) Do not max out your cards! Each person will tell you something different on how to use your cards. Trust me. If you’re not sure about trusting me, then try my way and see if it works (I guarantee it will and I don’t say that lightly). Using 30% of your cards is “good”. Using 10% of your cards is “great”. Using 8% of your limit is the “magic” number when your scores are calculated. Use 0% and you run the risk of having your cards closed out or your limits lowered without your permission (yes credit card companies can do this). Use a small bit and pay it off each month. This makes the credit cards stay active and open and you have a credit card debt free life.
4) Don’t worry about your student loans. Student loans (like home loans and auto loans) are considered positive debt. Anything over $50,000 and you’re likely to never pay off these loans (unless you’re a lottery winner – probably not going to happen). Pay the minimum. The amount of student loans have a very small negative effect on your credit (maybe 5 points). Throwing money at the student loans also has a small positive effect on your credit (maybe 5 – 10 points). So, stop worrying. When lenders calculate your desirability they calculate your monthly payments NOT your overall debt. They don’t see that you owe $150K they see that you pay $150 a month.
5) Don’t pay late. Ever. Can’t pay all of your bills this month? Pay your mortgage, auto, credit cards and student loans (or enroll in a financial hardship program). Utility companies, cell phone companies, cable etc. do NOT report to the bureaus for late payments; they only report for defaults.
6) Ignore the people who tell you they have scores in the 800s. 99% of them are liars.
Overall? Keep it simple.