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Three Small Credit Score Factors to Guide You to Financial Safety

In previous articles, I have talked about the two main components that affect your credit score, Past Delinquencies (35%) and Revolving Debt Ratio (30%), but know that these are not the only ones. The lesser-known factors that make up your credit score include the Average Age of Credit File, Mix of Credit and Inquiries. These three should not be ignored, especially if you are trying to build your credit. I will explain how each one works and how to use them to your advantage.

Average Age of Credit File (15%)

What most people do not realize is that old credit cards can help your credit score. The credit scoring model looks at how long you have had your credit. Your credit file age is determined by the oldest card in your file. Your credit report shows the month and year each card was opened. If the oldest card in your credit file was opened September of 1998, your file’s age is nine years-old. If you were to cancel this card today for a new one, the age goes to the second oldest and those nine years of credit history are gone. Canceling credit cards, especially older ones, is credit score suicide – so to speak. The older your credit history is the better your score and the higher your average. The average age can be determined by averaging out the ages of all your accounts. For example in addition to that nine year card, you have two other accounts that are one and five years-old. The average age of this credit file is five years. If you cancel the nine year card, the average age would fall from five to three years. This number constantly changes as items add to or fall off credit reports, but canceling a card means that you can never use it again to help your average.

Mix of Credit (10%)

In order to achieve the maximum amount of points in this area, it is best to have a healthy mix of credit: three to five revolving debt credit cards, an auto loan and a mortgage account. This does not mean that you have to use all your credit cards all the time. You can use one or two cards as your primary source of credit and the others at least once every six months so that they do not become inactive. An inactive account does not help the average age of credit file and hurts your debt ratio because you will have less available credit. The more cards you have, the easier it is to spread your debt and decrease your debt ratio. With a low debt ratio, you can also take advantage of zero percent offers. Mortgage accounts can not only help in this field, but also can increase your score. I recently spoke to someone who had a mortgage account that had a $600,000 maxed out loan. Prior to this mortgage he did not have a home loan on his credit file. His score went up 14 points because this account helped him fulfill a healthy mix of credit.

Inquiries (10%)

Inquiries are petitions to view your credit and only affect your score for one year, but can stay on your credit report for two years. The types of inquiries that do not affect your score are your own credit requests, job related requests, insurance and account reviews by credit card companies for their own or promotional purposes. Other inquiries can negatively affect your score zero to 50 points, but 90% of the time you will only be docked five points or less. Also only the first ten inquiries reduce your score, which means that the eleventh, twelfth, or more inquiry in any given year will not hurt your score.

However, do not assume that because you already have 10 inquiries you are in the clear. A lot of times inquiries are lumped together. The newest scoring model treats all mortgage and auto inquiries within a 45-day period as one each. For example if out of those ten inquiries five were mortgage, five auto and they were all made within a 45-day period, the ten inquiries are seen as two and the next one pulled will count as a third. You also have a 30-day grace period from the first auto or mortgage inquiry pulled until your credit takes a slight hit.

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Although these factors may seem small in comparison to the two others, together they are 35% of your score. Sometime starting out small can garner great benefits, especially when trying to raise a credit score. These three are easy guidelines to follow and can help balance your credit report if you have a few delinquencies. If you remember to not cancel credit cards, keep a healthy mix of credit and keep track of your inquiries, you will be on your way to a sustaining financial health.

Brought to you by Financial Solution Services' Research & Development Team