We've been doing a series of articles about how to get your score over the good credit hump and into the land of excellent credit. It's easier to jump from the fair credit to the good range, frankly. But with a little finesse, you can make the leap to great credit and get the extra perks that come with that, such as cheaper insurance rates, better credit cards, and more. All you need to do is pay attention to the lesser-known factors in your credit score.
Breakdown of the FICO Score
Just a brief reminder about what goes into your FICO score. Keep in mind that the weights given here might even vary by individual based on the details in your credit report. Yes, this is a bit murky! But it's essential to have a general understanding of the basics so you can maximize your chances of raising your score.
Here are the five factors, along with their respective weights:
- Payment History (35 percent).
- Amount owed, which is the amount of credit you've used (30 percent).
- Length of credit history (15 percent).
- Types of credit used (10 percent).
- New credit (10 percent).
In Part 3, we talked about the importance of a "mix" of credit types. Now, we're going to dig into the length of your credit history and look at how it impacts your score.
The Length of Your Credit History
In this category, the longer your credit history, the better the chance for a good score. In other words, the score algorithm gives more credit (pun intended) to those who have had credit longer. If you've been using credit responsibly for years, then this makes you look like a low risk to the credit card issuers, which is a good thing.
Let's take a look at some of the specific details that the score targets:
Age of your oldest and most recent accounts
Many folks worry that closing their oldest account will result in a score decrease. This is a valid concern, but not for the reason you think. When you close an account, you don't immediately lose the history associated with it. The account history could stay on your account for up to 10 years after it's closed. So your score won't take an immediate hit.
The bigger worry with closing an old account, where your score is concerned, is the decrease in available credit. This can make your credit utilization ratio go up, which in turn, can cause your score to go down.
The best approach is to hang on to the card and use it once a month for a small purchase to keep it active. If there's a cost associated with the card, such as a high annual fee, then that's a good reason to consider closing it. But if at all possible, keep the account open.
Activity on accounts
The reason you want to use a card at least once every month or so is because the issuer might decide to close your account due to inactivity. If an account is closed, it looks better if the decision was made by you. This is one reason why you don't want to open credit cards just for the sign-up bonus. You could end up with more cards than you can reasonably use.
There's a myth that you have to carry a balance to earn a credit score. This is not true. You do need to use your cards to generate a score, but it's always best to pay the balance in full and avoid paying interest on your purchases. And by the way, if you're brand new to credit, it takes about six months to generate a FICO score.
Length of time each type of account has been opened
The score considers, for instance, how long you've had your mortgage or your car loan. It also considers the average age of your credit card accounts.
How to Boost Your Score in This Category
This category is 15 percent of your FICO score. If you have an established credit history, then the best way to score high in this area is to keep your oldest accounts open. There are exceptions to this rule, as already mentioned, such as a high fee. But in general, keep all of your accounts open and active, even if it's only one transaction a month.
Because the average age of your accounts is considered by the score, think twice before opening a lot of new accounts. When you open new accounts, it lowers the average age of your accounts. The older the average age, the better.
How to Get a Free Credit Score
While you're working on your score, you can gauge your progress by checking out LendingTree's Free Credit Score, which uses VantageScore 3.0. This score, obviously, isn't a FICO score, which is what most lender's use. But LendingTree's free score considers most of the same factors and you'll get "graded" on each variable. This is extremely helpful because you'll know the exact areas you need to work on.