The Right Credit Mix
Maintain a mixture of revolving and installment loans. Don’t just have credit card debt in your file. Revolving debt has a payment amount that adjusts monthly based on the amount owed. An installment debt is a fixed payment, for a fixed period of time. As on time payments are made, it will quickly impact the scoring. Why? Because it is not a line of credit, it is a loan with a SET monthly payment. As each payment is made, you reduce the balance and show that all important “willingness” to repay your debt.
Bad debt. If you have “charge offs” or “judgments” you can actually settle these amount for sometimes pennies on the dollar. Just call them, be honest and tell them your situation. Then make an offer. Be firm on the amount, but be ready to pay it. Remember, a charge off WILL NOT always keep you from getting a mortgage loan at a great rate. A judgment can! There is a difference. (Never tell them you are trying to buy a home..this can be the proverbial “kiss of death” when it comes to settling.)
Don’t shop your credit. Every inquiry can reduce your credit score by 5 to 15 points. It takes typically 30 to 90 days to build them back up. If you make your payments on time, you can shop with confidence without the need to have your credit pulled by every car dealer in town.
In the past, the rule of thumb was, don’t have to many open lines of credit. While in rare instances this applies, that is simply not the case with today’s “loose” credit market. Your available credit is reflective of you ability to manage it. So,unless you have 6 or 7 pages of open lines of credit, or have a tremendous amount of debt versus income, if you pay your debt timely and follow everything in here, your scores will be high enough you don’t have to worry about it. Your goal should be to get your credit scores above 740. It’s very easy to do, and once you get there, pretty easy to maintain following these steps.
Finally….. Your ideal debt. To achieve a peak credit score the rule of thumb on revolving debt is in fact about 10% of your GROSS household income. The rule of thumb for total debt (Revolving, Installment & Mortgage), should not exceed 35%.
Individuals who manage their resources this way, have significantly higher credit scores, significantly more savings, more assets and more financial flexibility than the “average” American. This by itself protects your credit.