How do I get in the game? Part II

During part 1 of this post, I shared information about how to get into the credit card rewards game.  Today, we’re going to complete that discussion and cover the credit score in more detail.  MyFico.com has an excellent resource page with information covering credit scores. 

Your credit score is calculated using both positive and negative information on your credit report.  It weighs the information based on a proprietary model and then produces a score.  The illustration below from MyFico.com shows the weighting percentages:

As you can see, payment history and amount owed are the two biggest factors that affect credit scores.  They are controllable factors with the proper knowledge and discipline.  How can this information be used to get into the credit game?

Credit issuers aren’t likely to list a particular score range that is necessary to qualify for one of their products.  Based on anecdotal evidence, you generally want to have a credit score of 660 or higher to get a viable credit product and a score of 720 or higher to acquire the best products and the best rates.  I must stress that this is anecdotal evidence that I have gathered during my many years of perusing credit card forums.  If your score isn’t high enough to get the product that you are shooting for, you here are some tips.

Payment History

Starting today, pay all of your bills on time.  Any payment that is 30 days late, with few exceptions, will show up as a derogatory entry on your credit report.  Even if you pay the bill on day 32, it will take time to recover from the hit that your credit score will take.  Don’t fret and give up if you can’t make the minimum payment.  When you find yourself in this predicament, call your creditor and explain your situation.  Attempt to work out payment arrangements that allow you pay amounts that you can afford without damaging your credit score.  It’s important to note that once a late payment shows up on your report, it’s there for 7 years.  If you’re new to credit, avoid this at all costs.  If you've already experience a mishap, start a new habit of paying on time right
now.  I personally use Mint.com to easily help me keep track of my accounts and due dates.  I encourage you to check out that site.

Amounts Owed

As I mentioned in my profile, I mishandled credit during my collegiate years.  I ended up with accounts in collections a year or so after I graduated.  Realizing the error of my ways, I called my creditors and paid my debts.  Admittedly, I actually negotiated settlements and paid a less than 100% of some my debts.  You can choose to simply pay off the entire amount, or take the same course of action.  I am not promising that a creditor or collection agency will offer a settlement, but it doesn’t hurt to ask.  Once I paid the settlement or entire debt, the account would indicate this on the report.  I encourage you to take control of your financial destiny and take similar steps.  You will have a great sense of accomplishment when you rid yourself of the shackles of debt.

Managing the amounts you owe on your accounts that are open and current is vital to your credit score as well.  This generally applies to your revolving credit, such as credit cards.  Again drawing form anecdotal evidence, you don’t want to use more than 30% of your available credit on any of your individual lines of credit.  Personally, I have decided not to use more than 10% of my available credit.  I believe that this makes me more attractive to lenders, and it makes me less vulnerable if something happened to my financial well being for a period of time.

Here is a vital additional bit of information regarding amounts owed.  Generally speaking, the amounts owed that show on your credit report will be the balance on your account when your billing statement closes.  To ensure that your amounts owed and overall credit utilization is low, you want to make sure that you pay your balances down before the billing cycle ends.  I have made it a habit to ask my credit issuer for my billing cycle close date when I am initially approved for a credit card.

Length of Credit History, New Credit, and Type of Credit Used

The sooner you can get into the credit card game, the sooner you can earn and save money.  It will also help you establish a history with lenders and show a pattern of on time payments.  Applying for new credit can have an impact on your score, but it’s generally small.  You want to slowly add cards to your portfolio if you are a new credit user or recovering from poor credit decisions in the past.  Six months of good payment history is a solid benchmark when you are in this predicament.  Finally, it’s good to have a mixture of installment loans, such as auto loans or mortgages, in addition to the credit cards on your report.

Using the tips above, you can prepare your credit report and score for credit card applications.  In the next few posts, I will discuss the application process and how to determine what cards to apply for.