Hello and welcome back to the third and final part of understanding your credit. In our first two articles, we talked about payment history being 35% of your credit score and credit utilization being 30% of your credit score. What makes up the last 35%? It is comprised of your mix of credit, length of credit history, and new credit obtained. Below you will find each outlined for better understanding:
Mix of Credit – 10% of your credit score is comprised of how well you manage the various credit you have obtained. There are two types of credit which are known as revolving and installment. Revolving credit includes credit cards and lines of credit which are considered open-ended loans (meaning you can keep borrowing against them). Installment credit, such as mortgages, personal loans, or automobile loans are close-ended (You cannot borrow against these types of loans). Lenders will look at this mix of credit to see how well you have managed them, what your payment history looks like, and what your mix of credit contains.
New Credit – 10% of your credit score is comprised of how often you apply for new credit. Applying for new credit requires what is called a “hard pull” on your credit report, which will result in a drop in your credit score. Lenders view these new inquiries for 12 months; however, they can still show on your credit report for up to two years. Applying for a lot of new credit in a short amount of time can be a red flag to lenders. However, there are times when having your credit run frequently can happen. This usually occurs when searching for the best rate on a large purchase, such as a mortgage or an automobile. This is considered “rate shopping” and if you obtain a loan within 30 days, these inquiries do not affect your score. Additionally, if you are trying to get a good mix of credit and need to open a few new trade-lines, don’t panic if your drops a little, as it will bounce back rather quickly if you manage your accounts properly. Overall, you will end up with a better credit score in the long run.
Credit History – Credit history may be worth only 15% of your credit score but plays a larger role when applying for credit than you might think. Lenders are more likely to approve loans on a member if their credit report reflects a positive payment and credit history. A good tip to be aware of is keeping zero balanced credit card accounts open, even if you are not using them. This helps to improve your score by showing positive credit history.
Having a positive credit score with the right mix of credit, new credit, and credit history can save you money over the life of any loan you may be applying for. Do you need some assistance in improving your credit score or building savings? Contact Carrielyn Reynolds at Creynolds@newdimensionfcu.com or (207) 872-2771 today.