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12/22/2006

Intro to Credit Gaming - Part I

The first thing to know is what goes into your credit score. According to Wikipedia, FICO components are:

  • 35% payment history (on-time vs. past due) -- goes back 7 years
  • 30% ratio of current debt to credit limit
  • 15% length of credit history
  • 10% types of credit used
  • 10% recent credit requests and recently obtained credit
These percentages are given as a rough starting point and should not be taken as gospel, but I doubt they are ever too far off from the actual calculation. The first thing you should notice is that there are two "big boys" which each are roughly equal to the other components combined. These major players are Payment History and Debt/Limit Ratio. As these are the largest components of your credit score by far, they are where you should focus your efforts. I will cover the first point now and save the others for later.
Always, always, always pay on time. If an account is no more than 30 days past due, it is not considered late. My current credit report shows no missed/late payments on any of my accounts, ever. I came close a couple of times. Once, I was basically unemployed, so my mom bailed me out on a car payment that I couldn't make for the month. It was nearly 30 days past due, and she didn't want me to ruin my credit score. Thank goodness! However, there is some question as to how badly a single late payment can hurt your score. I have read that one or two scattered missed payments won't really hurt you substantially (at least once enough time has passed, say 6 months or a year), but a recurring pattern will really do you in.
If you cannot pay on time, minimize the number of missed payments. This was my strategy before my mom bailed me out: I was able to pay all of my 4 credit cards' minimum payments that month, but I was going to miss the car payment. If I had skipped all of the credit card payments, I would have been able to afford the car payment. So rather than have 4 missed payments on my credit report, I aimed for just 1. Obviously I never saw how this played out, and I can't really do a test to verify this advice, but it seems fairly obvious.
Next time: Credit Limit to Debt Ratio!

1 comment:

Nona said...

I hope you paid your parents back for bailing you out.