There are five factors that comprise your credit score. These are listed below in order of importance, just as an underwriter will look at the score:
• Payment History: 35% impact. Paying your bills on time and in full has a positive impact. Late payments, judgments and charge-offs have a negative impact. Missing a high payment has a more severe impact than missing a low payment. Delinquencies that have occurred in the last two years carry more weight than older items.
• Outstanding Credit Balances: 30% impact. What they’re looking for here, is how many accounts you have open, and what the balances are on the accounts. If you owe a lot of money on a lot of accounts, this is a risk that, in the future, you’re more likely to make payments late, or not at all. The amount of your outstanding balance compared to your available credit limit is important here. If you are near your max, it hurts your score. The less available credit you use the better. It helps your score if you spread your debt around several cards, using no more than 30% of your available credit limit.
• Credit History: 15% impact. How long have you had credit, how long has it been since you’ve established each particular account, and how long has it been since you’ve used the credit line? A seasoned borrower with well established credit is stronger in this area.
• Type of Credit: 10% impact. A mix of auto loans, credit cards, and a mortgage is ideal, and reflects better than if all of your debt is from credit cards only.
• Inquiries: 10% impact. Every time you apply for credit, it shows as an inquiry in the credit repository. Inquiries can lower your score because applying for more credit means you may be taking on new debt. This takes into account the number of inquiries that have been made on your credit history within the last six months. Each inquiry can cost from 2 to 50 points on a credit score. If your credit score is high, the inquiry won’t affect you much. But if your credit score is lower, new credit is looked at as a big problem, and can bring your score down by as much as 50 points. Also, if you’re about to buy a car or apply for a mortgage and have your credit run several times, make sure you do it all at once. It only counts as one inquiry if they’re all done in a 14 day period.
Remember, these scores are calculated by a computer that’s not taking any personal factors into consideration. When a credit report is generated, it’s simply a snapshot of your credit profile for that day. Scores change, sometimes by large amounts in a short period of time. You just need to be aware of what you’re doing, and make sure you don’t go on a spending spree before applying for a loan.
To make sure you don’t have a problem when you’re ready to buy, it’s important to have a loan officer review your credit and make sure you are on the right track. I am available to speak with you to help you understand your personal situation.