Managing Your Credit Score (part 5 of 8)
Amount of Time Credit Has Been In Use (Length of Credit) 15%
Generally speaking, the longer the credit history the better your score. However, this factor only makes up 15% of your total score so even young people, students or others with short histories can still score high overall as long as the other factors show good. If you are new to credit then there is little you can do to improve this part of your score. Open an account and be patient:
- How long your credit accounts have been open or the number of months you have been in the credit bureau’s file.
- The age of your oldest account and the average age of all of your accounts are taken into consideration.
- How long it has been since you used certain accounts as well as the mix of older and new trade lines.
Pursuit of New Credit (10%)
Credit is much more popular today. Just look at the number of credit card offers you get via the Internet and in the mail. Consumers can now shop for credit and find the best terms to meet their needs. Each time someone runs a credit check on you, it creates an inquiry.
Fair Isaac has changed some of its calculations to account for these new trends. Specifically, they treat a group of inquiries – which probably represents a search for the best rate on a single loan – as though it was a single inquiry (note: this only applies to auto or mortgage loan inquiries.) For example, auto loan inquiries that are within 14 days of each other only count as one inquiry.
Your score takes into account how many new credit obligations have recently been assumed? Opening several credit card accounts at the same time can look bad. What FICO looks for is “To what extent is this consumer trying to open new credit accounts?”
How recent were these efforts? How long it has been since you opened a new account. Primary consideration is given to the following:
- Number of inquiries in last six months
- Number of trade lines opened in last year
- Number of months since most recent inquiry
There are no good inquiries. Inquiries are typically seen as a request for credit and thus are factored as if you are searching for credit. Every time you fill out one of those credit card applications to get a free hat, you are also getting a free inquiry. Every time you fill out an online application for a credit card, or other type of loan, you are getting an inquiry. Too many inquiries look bad. While there are no good inquiries there are neutral inquiries. These inquiries are most often known as:
- Consumer initiated. A request for your credit report shows as a consumer inquiry. When you run a credit check on yourself. (provided that you don’t call your mortgage broker buddy to pull your report)
- Pre-Approval. If a potential lender has viewed your credit reports to determine whether they want to offer you a loan, these are not factored into your score. However, once you fill out a credit application, your full report will be reviewed and a “bad” inquiry will appear on your reports.
- Periodic Review. Many lenders will periodically review the credit reports of their current customers to see if there have been any major changes to their credit reports. If the lender discovers that your credit score is now too low for their standards, they may close your account. These inquiries created as a result of the periodic reviews are not supposed to be factored into your credit score.
| Experienced The Following Inquiries | # of Days Ago | # of Inquiries | Notes |
|---|---|---|---|
| Dept. Store | 68 | 1 | Applied for one dept. card |
| Mortgage | 65 | 1 | Two mortgage apps within 30 days. |
| Mortgage | 56 | 1 | Two mortgage apps within 30 days. |
| Auto | 25 | 1 | |
| Auto | 9 | Not counted at all if within 30 days of first inquiry. | These two don’t count at all as they were within 30 days of the first app and within 15 days of each other. |
| Auto | 7 | Not counted at all if within 30 days of first inquiry. | These two don’t count at all as they were within 30 days of the first app and within 15 days of each other. |
| Bank Card | 5 | 1 |
How inquiries are computed is somewhat complex. The above table is meant as a basic guide but does not cover all the different calculations. As a reasonable measure you should avoid unnecessary inquiries. The system is designed to take into account rate shopping but things like applying to credit card offers will add inquiries to your file.
Types of Credit Experience (10%)
A healthy mix of different types of credit, installment loans, retail accounts, credit cards, and mortgage. This score is not normally a key factor in determining your score but it can help a close score. Its not a good idea to try and open different types of accounts just to try and make this factor better. It will likely reduce your score in other areas. You should never open accounts you don’t intend to use anyway.
What type of accounts you have, and how many, can make a big difference. The optimal ratio of installment versus revolving accounts depends on your profile and differs from person to person. One factor that seems to have significant influence is your percent of open installment loans. Too many can lower this portion of your score.
Look forward to next week for our part 6 of 8 on Managing Your Credit Score series.