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Credit Scores Ubiquitous in American Life Today

Credit scores did not exist in the late 1960s until BankAmericard and Mastercharge cards were mailed out willy-nilly to Americans coast-to-coast, without regard to creditworthiness.

Credit Scores Ubiquitous

In the 1970s credit cards exploded nationally as competition heated-up. In the late 1980s debit cards were issued to most anyone with a bank account.

Over the past 20 years, all credit is based on creditworthiness as calculated in the all important credit score. Couples may use a credit score to vet a potential mate.

A personal credit score, ranging from 0-850 has six components, in order of importance

Credit Score Components

Payment History (late payments)

Amount of Current Debt (% of credit available

Credit History Length (oldest account)

Credit Mix (credit cards, auto loans, mortgages, etc

New Credit (number of new accounts opened)

Average credit scores for consumers in the U.S. continue to hover around 700.

Credit Score Impact

Payment history makes up 35% of your total score. One 30-day late payment can drop a score by 20 points or more. A 60-day late payment can be very devastating. The impact fades over time, usually two years, provided there are no additional late payments.

The amount of total debt in relation to total credit available comprises 30% of your total credit score. This is also referred to as credit utilization. Maxing out your credit cards, owing more than 90% of your available credit is very hurtful to a credit score, dropping a score by 60 to more than 100 points. Most lenders see high credit utilization as a red flag of financial trouble. Ideally, lenders like to see overall credit utilization below 30%

The length of your credit history represents 15% of your credit score. The length is based on the oldest account listed. Credit bureaus retain “good” account information, while “bad” older accounts reflecting late payments, charge-offs, unpaid balances are deleted after seven years.

Credit mix shows the various types of credit you carry. Having credit cards, an auto loan and a mortgage is considered “exceptional.”

New credit is the number of inquires and new accounts you recently applied for or were approved for. Generally, when you submit a credit application your score will drop by 3 points, regardless if you are approved or not.

Credit Improvement Tips

A. Never make a late payment. If you are in an impossible situation, such as natural disaster victim, call the issuer to extend the payment due date to save a late fee and/or extend the closing date to avoid a reportable late status.

Best late payment advice is to make the minimum payment as soon as possible, and then make a second payment before the closing date to reduce the balance reported to the credit bureaus.

B. To reduce debt utilization cut total debt using other assets. The other way is to raise your available credit by taking on another loan. This new loan could also consolidate credit card accounts, lowering debt service costs (interest, fees, etc). If you go this route do not close any accounts as your goal is have the highest credit available and lowest credit used.

C. There is little you can do to change your credit history length. It is possible to request an older “good” account be added but it usually is not worth the effort.

D. A good mix of credit types can be very helpful to achieve a credit score above 720.

E. New credit requests should be carefully selected as lenders see this as a red flag of financial trouble. Research a potential offer carefully. Ideally, you want an attractively priced credit card from a big bank. Big banks offer big credit limits over time.

Additional Credit Score Tips