2015 is right around the corner and with all the holiday shopping and festivities, it is very common to forget that your credit is most vulnerable during busy holiday seasons, partly because it is neglected and partly because you are more likely to rack up charges on your credit cards. Knowing that, you are now aware and able to ensure the end of 2014 doesn’t cost you a bad credit score in 2015. Here are some important facts to consider this holiday season, so that you may understand how your credit score fluctuates.
The first and most important step of taking control is understanding your credit and not allowing all the myths behind the infamous FICO score to keep you from taking correct steps to a perfect 800+ score.
A FICO score ranges from 350-850 and is an algorithm to determine the likelihood that someone may default on a loan. While a FICO score is often referred to as a credit score, there are many variations of that same score being labeled as such by vendors and websites trying to sell you monitoring software. Your real FICO score is liquid and therefore can change at any given time it is pulled, meaning that from one day to the next you could go from an 800 to a 600 and vice versa.
15% of your credit score is based on the average length of time you have had credit. Regardless that you have credit or not, opening a credit card regardless that it is secured or not will start establishing you credit history. Don’t delay anymore especially if you have no credit cards; take the first steps to establish new credit now. If you do have credit well established, don’t fall in the trap of closing down long standing accounts in 2014 thinking it will help you in 2015 just because you are no longer using those cards. Put them away rather than closing them so you don’t lose the history and length of time some of your older cards have earned you.
30% of your FICO score is based upon what your current balances vs. credit limits. To have the best score possible try to keep your balances below 30% ($300 balance on a $1000 limit card) or try to spread your balances between multiple cards and credit lines. Usage of credit is usually the biggest mistake people make during the holidays as they charge all their holiday shopping on 1-2 cards and either over extend themselves or simply keep high balances for a few months as they pay them down.
35% is based upon payment history, which identifies how have you paid on all of your previous and current accounts. Were you 30 days late a few times just because you failed to remember payment due date? These are things that can haunt you for 7 years and control the largest portion of your credit score. Collections & judgments are much worse and severely impact credit scores. If you have made a few mistakes that have no patterns related to them, consider writing a letter to the credit bureaus explaining the situation as many of them will agree to remove a few especially if there are no patterns in your defaults. If you have collections on the other hand, make sure to call the collectors and negotiate such debt down, then pay them off before 2015. You’ll have to do at some point, and now would be a good time.
10% is from your mix of credit. Do you have only credit cards? Banks and lending institutions like to see that someone is used to making consistent monthly payments like a car payment or mortgage.
10% of your score is new accounts or inquires for new accounts. It becomes a red flag to the credit bureaus if someone suddenly needs 10 or 15 new lines of credit; they begin to think you are looking to float money between accounts because you may not be able to pay your bills. This is very important because you could trigger this by taking massive steps to consolidate or clean up your credit in early 2015, instead start now in 2014 so you can space out your consolidations etc…
By understanding this rather simple aspect of how your FICO score works, you are able to manipulate your score up as much as possible in the next 30 days and ensure that you continuously improve your credit rather than compromise it, especially as a new year approaches.
Happy Holidays to all and don’t forget to pay attention to your credit this holiday season.
About the Author: Michael E Morgan is the founder of Credit Forget it (www.creditforgetit.com), an organization whose sole goal is to help America rebuild its credit one person at a time. Make sure to follow him at www.michaelemorgan.com