When clients come to see us about foreclosure, loan modification, short sale, bankruptcy or debt settlement, one concern is the impact of all of these things on their credit score. While we understand that concern, it is often overshadowed by our goal of reducing debt, because credit can be rebuilt. We first need to understand how a credit score is calculated, in order to understand how to rebuild a credit score.
A credit score is calculated based on the following 5 factors, with the percentage weight of each factor:
- Payment History - 35%
- Credit Utilization - 30%
- Length of Credit History - 15%
- Credit Mix - 10%
- New Credit - 10%
Based on these factors, there are some myths and misconceptions associated with each of these factors.
Some people believe paying off a long-standing debt will improve their credit. It may in the long run, but in the short term, paying a long-standing debt might "revive" that debt on your credit, thus decreasing your score because payment history is used to determine how past long-term payment history will affect future long-term payment history.
Some people open lots of cards but never use them, or worse open cards and charge them to the maximum allowed amount. This may impact credit utilization negatively. The better strategy may be to utilize each card, but only slightly - rather than charging $1,000 on one card, charge $200 each on 5 cards, then pay those balances down each month.
Another myth is that closing an old card will be beneficial, but this may hurt your score in terms of length of credit history. If you have to choose between closing the card you've had for 10 years versus the card you've had for 2 years, close the one that is 2 years old and keep the 10-year old card. The greater the length of time the more data the credit agencies have, and utilizing credit properly will increase your score.
Recently, we had to replace some major appliances in the kitchen. While we could have simply pulled money from savings to buy those appliances, we financed them through the retail store at 0% interest, because having a good mix of credit - House, Car, revolving, etc. - is better than simply paying cash for everything (and at 0% interest, it is just like paying cash). Plus, opening a new card, sparingly and only when needed shows that I was taking on new credit strategically and responsibly.
Most people are familiar with the term FICO score - which is their credit score. FICO stands for Fair, Issac and Company and that company has focused on credit rating services for so long that FICO is the most well-known service in the industry.
For more information on credit ratings and credit repair, please subscribe to the Yesner Law Podcast, on iTunes and Stitcher. If you prefer, please contact us to schedule a free initial consultation to discuss your options at 813-774-5737 or email me directly at firstname.lastname@example.org.
Shawn M. Yesner, Esq., is the founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate debt by providing options, so they can live the lifestyle of their dreams. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay area.