What are the ingredients to your credit pie?

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Pie Chart

With any recipe, the right combination of ingredients is the key to a successful dish. But do you know the types of credit and how much you need of each? Today we will go over what each portion is, and what the right combination looks like:

Types of credit- Various types of credit including revolving credit, (such as credit cards,) installments, (auto or personal loans,) and open/other, (student loans,) make up 10% of your score.

Length of history- 15% of your score is calculated by the average length of open accounts. For example, if you have a 60 month auto loan, a credit card for 48 months, and a 12 month personal loan, the formula would look like this: (60+48+12)√∑(3)=40 months of credit history. Closing old accounts can actually have a negative impact because of this.

New credit- 10% New accounts may drop your score initially because of the new debt, but you regain those points once you have established a few months of on time payment history.

Payment history- A whopping 35% of your credit score is payment history. This includes all negative and positive payments. One of the biggest culprits of negative information… (dun dun dunnnn) late payments.

Amounts owed- This section is only comprised of revolving accounts, i.e. credit cards. Correct utilization is key to getting the most of this huge 30% slice. Each card holds the same weight, and the accounts are calculated based on the balance to credit limit ratio. This means if you have a card with a $300 limit, and you have a $250 balance, it is actually hurting you more than a $10,000 card with a $2,000 balance. To benefit the most from your cards, only utilize up to 30% of the limit.

Knowing the ins and outs of credit and making the most out of every piece of your credit pie can mean the difference between your dream home, and continuing to rent. Call or click today for the expert advice to get you on the right track!


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