Understand Credit Scoring
Your Credit Scores Indicate the Likelihood That a Loan Will be Paid On Time
Did you know you have different types of credit scores? It’s like comparing apples to oranges. Since different types of creditors use different scoring formulas, you can’t compare online credit scores to scores obtained from a credit card company, mortgage company, etc.
Know the Scoring Factors
Payment History: 50% of the Score.
- Make Payments on Time. On-time payments are the foundation of good scores.
- Last 2 Years of History. This impacts the score the most. The longer your payment history, the more it helps you score.
- Number of Open Accounts. The number of accounts factors into your payment history. Ideally, you want 4 or more open accounts.
- More Adverse Accounts. More adverse = lower scores. Newer adverse accounts hurt more than older ones.
Amount of Debt: 35% of the Score
- Don’t Max Your Cards. Lenders think you’re a greater risk.
- A New Loan is a New Risk. If your credit report doesn’t show much debt, a small new loan ($1,000) hurts scores for 4-6 months. A big loan ($25,000) hurts scores for a year or more.
- Credit Card Usage Ratio. This is your total balances divided by total limits. A higher ratio means lower scores.
- 0-30% = doesn’t hurt scores
- 30-60% = scores drop 20-40 points
- 60-100% = scores drop 40-100 points
Mix of Credit Types: 10% of the Score
- Variety of Account Types. Showing you can handle a variety of credit obligations helps scores.
- Mortgage Accounts. This refers to home & real estate loans.
- Revolving Credit. These are credit cards, charge cards & home equity lines-of-credit.
- Installment Accounts. Auto, recreational, or student loans paid by monthly installments.
- Utility Accounts. Accounts requiring the full balance be paid every month.
Inquiries: 5% of the Score
- Only hard inquiries affect your score. These occur when you apply for credit (i.e. mortgages, auto, credit card, cell phone.)
- Hard inquiries affect scores for 6 months. Even though they remain on your credit report for 2 years, they affect your scores by 4-10 points per inquiry depending on the type of credit application.
- Mortgage Inquiry: 4-7 points
- Credit Card Inquiry: 6-10 points
- Multiple inquiries while shopping for loans. All mortgage and auto inquiries made within any 14-day period counts as only one inquiry against your score.
Brought to you by: Credit Matters