I have said before that credit repair is like unlocking the Da Vinci Code. But it doesn’t have to be that hard. As a matter of fact, with some credit awareness, you might never need credit repair. Though your credit report may appear baffling at times, the most important thing to know is that there are five main factors that make up a FICO credit score – payment history, amounts owed, credit history length, new credit and types of credit used.
In the sometime bizarre world of credit, it’s significant to note that there are two main types of finance loans: revolving and installment. Installment loans consist of things like auto loans and student loans — money that is loaned with the expectation that it will be paid back in a relatively short period of time. Revolving loans, which are things like credit cards and bank cards, involve debt that is accrued and, ideally, paid off on a monthly basis (i.e. debt management). For the best possible credit score, it’s recommended that consumers try to establish a good balance between installment and revolving loans. But to compound the situation, there’s one other type of loan that can greatly aid your credit score for the better in the long-term; a mortgage.
Mortgages—this is the loan we all know about—the one most of us need if we want a new home. When you’re first approved for your mortgage, it’s likely that your credit will take a hit in the near-term. But a mortgage is good for your credit score in the long run for two big reasons. One, it qualifies as a type of credit used. And two, if you make on-time mortgage payments, it will reflect well in the payment history portion of your credit score, which makes up 35 percent of your FICO score.
However in this Era of the Credit Dark Ages, it’s also worth mentioning that just because you have a variety of installment, revolving and real estate loans to your name won’t mean you’ll have a pristine credit score. Like I mentioned above, on-time payments are key. And it’s also key that you don’t have any unpaid loans that are taken on by collection agencies, as it’s hard to repair credit when you have something that could stay on your record — and influence it in a negative way — for up to 7.5 years. So while diversifying your credit is important, it’s important not to overlook other factors that go into the makeup of your overall score as well.
Start your own Credit Renaissance through diligent credit awareness, such as making your full payments on time and narrowing your debt-to-income ratio as much as you can. This will keep the Credit Monsters (collection agencies) and Unholy Trinity (credit bureaus) at bay and toothless.