Payment history – 35% – This is the biggest chunk of your score. The rule here is simple for those rebuilding credit. Always pay on time or early. As you are reestablishing credit, always keep a small balance on each credit card. Continue paying the minimum monthly payment as you rebuild your credit.
Amounts owed – 30% – This category is the next most important factor determining your score. The rule of thumb is to never have the amount owed against your revolving accounts more than 30% of your limit. Best yet is to have no more than 10% of your credit limit in use within any month. For example, if you have a total credit limit of $5,000 you would never have more than $1,500 of credit in use within the month. Best would be to have no more than $500 in use.
The FICO Pie Chart clearly shows the first two items account for 65% of your score. Your best course of action is to concentrate on the above two factors while keeping in mind these additional primary factors used to determine your score.
Length of credit history – 15% – Never close an established account. The myth persists that one will improve their FICO scores by closing older accounts. The opposite is true. Whenever possible reopen older closed accounts – the exact account number as when the account was originally opened. This strategy will not work if the creditor closed the account.
New credit – 10% – This is important to know as you begin to rebuild your credit. The best way to open new credit accounts is to do so in as close a time period as possible. Something else to keep in mind is to not open promotional charge accounts. Hard credit pulls negatively influence your scores. (More on hard -vs- soft credit pulls in a later post.)
Type of credit – 10% -Various types of accounts (credit cards, retail accounts, vehicle loans, mortgage, finance company, etc.) and the utilization of all accounts.