How to build good credit.
After any successful push to repair bad credit the next goal should be to establishand maintain good credit. The better your credit the more money you save over a lifetime.
Use the following information as a “guideline” when building good credit. The reporting agencies have a computer model that generates the credit scores using 40 different measures. The models differ for each repository and not all financial institutions report to all three credit bureaus. Hence, the reason the scores from the three bureaus can differ from 50 to 100 points. Based on our years of experience and information tracked by other companies and individuals, the following factors have been fairly consistent in how they affect credit scores.
The Minimum Mix for Laying the Foundation For Good Credit
One item being reported on your credit report is called a “trade line”. The ideal minimum mix for building good credit includes: 24 or more months of on-time payment history on one mortgage, one installment loan such as a personal loan or auto loan, and two revolving lines of credit such as credit cards. However, our experience shows that 3 to 4 revolving lines may have other advantages and will still generate great scores. In other words, 5 to 7 trade lines. Scores can be produced in less than 24 months, but again 24 months or more is ideal.
Revolving Debt/Consumer Debt
This refers to credit cards, personal loan, auto loans, etc. Again, the ideal mix to get established is one installment loan and three to five revolving trade lines. Credit scoring is based mostly on your ability to make on-time payments and the length of time a trade line is open. Therefore, the installment loan (auto loan, personal loan, etc.) should be for a minimum of 12 – 24 months. The credit cards, which can be charge cards from Visa, MasterCard, Target, Wal-Mart, any gas card etc. The cards do not have to have huge credit limits and the activity on the cards only needs to be once every three months with a simple purchase of gas or groceries and then paid in full the following month. If you carry a balance, ALWAYS make on-time payments.
Outstanding Account Balances
Scoring is also based on the ratio of debt to available credit. This refers to the total available credit on revolving credit cards and lines of credit. Scores drop based on percentage of used credit to available credit. Scores will drop when the ratio is over 30%. We have also seen drops in scores again when over 50% and then again at 100%. Closing revolving accounts in good standing with a zero balance can negatively affect your credit scores by increasing your ratio of used credit to available credit.
When closing any account, you remove an active trade line from your credit report. Your scores are derived from OPEN, ACTIVE trade lines. Closing too many or in some cases any at all, can prevent you from achieving maximum scores, and possibly lower your scores. It is better to put limits on your spending and take control of your finances. Create a financial plan!!
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