Just having a fistful of credit cards is not going to get you into the 800-plus range. But different types of loan accounts, which require you to make a set payment each month, can show that you’re disciplined with your debts.
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Dear Keeping Score,
What type of accounts do I need for a 800-plus credit score? -Willie
What an intriguing question! I will do my best to give you the most complete answer I can, because this is something to which many aspire, but few attain. I know you are only asking about the types of accounts you need, but I’m going to review the whole ball of wax in three parts: first, the types of accounts or credit mix; second, the score components; and third, the driver behind the score.
What you call “type” of accounts is known as credit mix in the FICO scoring language. While this may seem to be vague on the surface it really isn’t.
Your question brings up a great point: Just having a fistful of different credit cards is not going to get you into the 800-plus range. Credit cards are certainly part of the puzzle, but because of your ability to make varying payments (from the minimum due to the full balance), a credit card account that’s current can still mask an underlying issue. Accounts that require you to make a set payment each month require more discipline and stability to maintain over a long period of time.
Looking further into the value of a mix of accounts, an auto lender will look at your ability to handle a loan differently from a mortgage lender or a bank giving you a personal unsecured loan. Having a broad mix of loan types and handling them successfully tells potential lenders and the scoring model the most about your reliability as a borrower.
The types of accounts you have can make up 10 percent of your score, and as a result, it usually isn’t a key factor in determining your FICO score. However, it can be more important if your credit report does not have a lot of other accounts or much of a history on which to base a score. So, on balance, a healthy mix of revolving and installment loans is what you’ll want to shoot for to maximize your score.
Most important to your score is your payment history. If you have been reading this column for very long at all, you know that I always say to pay your bills on time, every single time. That’s because your payment history makes up 35 percent of your total score.
But what if you fall behind on one or more payments? Catch up as quickly as you can to reduce score damage. Just missing a due date by 30 days can blemish your score, but remaining late for multiple payment periods will hurt much more. It’s also important to know that the higher your score, the more late payments may hurt you. This falls under the old adage, “the higher you go, the farther you fall.” I will say it again: pay on time, every time and you won’t have a problem.
Following close behind in importance is amounts owed or credit utilization, which counts for about 30 percent of your overall score. Simply put, this is how much you owe in relation to how much credit you have available. Although less than 30 percent utilization is what is generally perceived as “the” number when it comes to credit card accounts, there really is no magic bullet here, except to say that less is more. Those with the best scores are in the 4-10 percent range, and they stay there consistently.
When it comes to installment accounts, the less you owe on the original loan amount the better. However, installment account utilization carries less weight than revolving accounts under this scoring factor.
The final two pieces make up the remaining 25 percent. Next in importance is the length of your credit history, or how long you have had your accounts. This piece of the pie is worth 15 percent of your score. And even though it’s not that much, it can be very important. Remember, closed accounts with a positive payment history stay on your credit reports for at least 10 years after closing. Having that positive history can only count for good in your score, which is why I recommend not closing accounts with good history even if you don’t use them much.
Lastly, new credit counts for 10 percent of your score. The low value of adding new accounts is the reason you should only open new accounts when you need them. I know you want to get to an 800-plus score, but I don’t suggest you go out and open a bunch of different kinds of accounts at once to try to get there.
Every new account you open creates the potential for new problems, at least until you have shown you can handle them successfully. The result is a temporary drop in your score every time you open a new account. (Not to mention the five or so points you’ll likely lose from a hard inquiry appearing on your credit report.) You don’t want that!
Now, here’s the driver behind everything. Credit scores use complex mathematics called algorithms to try to predict if you will default on your next loan. And they use the information in your credit report to feed their algorithms. Your credit report is a snapshot of your financial life. So, keep your financial life in order and your credit report and score will reflect it.
It’s just that simple after all. Remember to keep track of your score!