How many times over the past twenty five years have I been asked this question by frustrated individuals who feel like a failure due to a FICO score lower than a 780? The answer is hundreds!
Most people are very confused by the way credit scores work and how they represent who we are financially. Credit scores are an indicator of how we pay back and manage debt. Having a lot of money does not mean a lender can automatically assume the borrower will pay back a loan. Some very wealthy individuals default on debts and ignore making timely payments. The only way a lender can really make an educated guess is by seeing how an individual manages current open and active accounts as well as past credit. By looking at the history plus what management skills a consumer is using now can allow a lender to get a snapshot view of risk without visiting the borrowers hometown and speaking with all of his friends, business associates, and local creditors. This is a much more practical alternative than the old method before scores were created of visiting the borrowers hometown and speaking with all of his friends, business associates, and local creditors.
One factor that could weigh heavily on a borrower's credit score is a lack of open and active current credit. For example, if you have paid off two thirty year mortgages three years ago, as well as no credit card use in the past two years, you may find you don't even have a credit score. Having open and active credit shows the lender you are currently in the credit game and that your skills are sharp. What happened in the past won't help you if you have no active open credit. This means you MUST use the credit cards you have at least a few months out of each year or you may lose your score. Other effects of this example could be point reductions for inactivity and even creditors closing a card due to lack of use. Unfortunately, what you have done in the past won't help you if there is no current active use of credit. As long as you have primary open credit that is active showing on your credit reports, the score will give you extra points for the old closed credit that is still reported on your profile.
A good well rounded credit portfolio is also a great asset to scores. Without a variety of credit including installment, revolving, and mortgages, a score may wind up being lower than its potential. Having credit cards, car loans, student loans, and mortgages makes a consumer more attractive because it shows an ability to manage many kinds of credit at once. If all these accounts have a good payment history and are seasoned (older accounts) it tells a lender that you can juggle credit well. Having the ability to juggle credit gracefully makes you a more reliable borrower.
There are many consumers that feel without the highest score they are a failure; which is far from the truth. The FICO score ranges from a 300-850. Anything above a 740 is considered excellent. Having an 820 FICO score is as common as winning multi-millions in the lottery. If a consumer has an 820 credit score they should have a party instead of crying over the 30 points missing from the top of the range. Even a 780 is an amazing score and since credit is always changing due to balance increases/reductions, opening/closing credit, and inactivity of credit, it is very hard to keep scores at a set number. To have the highest credit scores, a consumer should have low balances on revolving credit, old average age of credit, a good variety of credit that is open and active, and great payment history.
Call us with any questions about your credit challenges at 877-292-0656 or visit us at www.precisioncreditrestoration.com!
Making sure credit is analyzed with future financial goals in mind is a MUST before taking an action that can foil those plans and limit a consumers options for a better quality financial life.
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