Who can you trust? Deb hears this question over and over again in her professional practice as an elder law attorney and a fee-only, holistic financial planner. Let Deb teach you how to protect yourself and your assets from those who might not have your best interests at heart. [Editor's note: Deb no longer contributes to Silver Planet, but we have made her archived blog entries available as a service to our readers.]
Fair Isaac Corporation uses a trade secret algorithm to construct your FICO score. However, the broad parameters of credit score construction are now known and consist of five components, with their approximate percentage contribution to the final FICO number. The following are three of the components; the remaining two will be discussed in the next blog.
Payment history = 35%: Do you pay your bills on time? If not, how frequently and recently are your lapses? Have any of your accounts been sent to a collection agency? Have you filed for bankruptcy in the last seven years?
Any filing technique, reminder service, or “tickler system” is essential to ensure timely payment.
Some credit card companies do have an informal grace period before your lapse is reported to the credit-reporting bureaus, although you can count on having a late fee assessed for even a one-day delay. Two late payments, and their capacity for grace is depleted, so prepare for a lower score for the next few years. Similarly, a late mortgage payment will lower your score for the next two years.
Credit utilization = 30%: How much do you owe? What is your unpaid balance on each card, and how does this compare to each card’s credit limit?
The single best thing you can do to increase your score is to keep your credit usage below 30% of your credit limit. Do not consolidate your loans onto one card. Spread out major purchases over several cards, if possible. It is better to have a large dollar amount spread out over four credit cards with a 25% balance to credit limit, than to have one card maxed out.
Length of credit history = 15%: How long have your accounts been open? (The longer, the better.)
Keep old accounts open, even if they have a zero balance and haven’t been used for years. Use that card for your next tank of gas, just to keep it active. My most recent credit report still has an account that I haven’t used for 14 years (I destroyed that card in 1995!), but it is still listed as “in good standing,” and its credit limit is still included in my approved available credit. Positive information remains in your credit file for at least ten years, so you might as well reap the benefits of your good history by maintaining those accounts.
By Deborah Hoskins, JD, CFP
The Wise and the Wary Blog