Credit Reports and the Importance of a Good Credit History

As you’re probably already aware, excellent credit scores in the FICO mold will require a multi layered credit history as well as a certain number of open accounts at the time the credit rating is calculated, but the specific numerical relationship between credit reports and the Fair Isaacs / FICO system remains a matter of dispute. Most every lending professional maintains their own definition of excellent credit scores employing the FICO model but suffice to say that a mid score (the credit score in the middle range of the three credit bureaus) above 750 should qualify the applicants to borrow virtually whatever they’d wish. For most lenders, however, there’s no express difference for FICO credit scores above 700, and, technically, within the mortgage industry, credit scores could be as low as 640 and still be deemed excellent, allowing the borrower maximum capacity for a home loan while featuring the lowest interest rates.

It’s generally acknowledged that ten percent of FICO scores pertain to the borrower’s current debts and borrowing capacity, and too much credit card debt and unsecured loans would surely drag down the scores. However, there’s an equal danger when consumers possess too little credit. While it’s difficult to say precisely what accounts would garner the most complimentary numerical results, FICO credit scores do tend to reward a mix of secured (mortgages, auto loans, investments) and unsecured (credit cards, overwhelmingly, for the average American) debts with balances equal to less than thirty percent of the potential debts that could be amassed.

The eight or so open lines of credit unhappily boasted by the average head of household within the United States would almost certainly be too many for top credit scores, but, at the same time, eight credit cards would still be better than none: purely for the purposes of credit scores, of course. Perhaps worst of all, however, would be an array of Visa and Mastercard accounts attached to some of the shadier, high interest lenders that are each at or over their spending limit. Credit reports do not only transcribe an official documentation of the borrower’s payment histories, after all; they also record the available and actual balances of each account. For this reason, much as families who’ve sweated blood paying off a particularly high interest/ high balance credit card may be sorely tempted to close the account after finally making what they hope would be the last payment, it’s important that borrowers maintain a variety of open credit sources, the older the better.

Also, remember, the FICO rating system will look at the accessibility of your credit as a whole and closing an account against which nothing’s owed has the same effect as borrowing more money as far as those all important ratios prized by FICO logarithms are concerned. For that matter, though this might seem cruelly counter intuitive to families fighting against their own unsecured debt burdens, the FICO design would prefer that the accounts are at least occasionally utilized (and quickly paid off so no needless interest would occur) Still, this doesn’t mean that every loan opportunity should be undertaken. Co signing for the loan of friends or family could effectively lay waste to sterling credit scores lovingly tended for decades should the loved ones prove unable to maintain payments.

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