The Five Factors of Credit Scoring                                              

There are five factors that comprise the credit score.  They are listed below and in order of importance, just as an underwriter would look at the score:

Payment History: 35% Impact                                                                                                                                         

Paying debt 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                                                                                                                   

This factor marks the ratio between the outstanding balance and available credit.  Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home.

Credit History: 15% impact                                                                                                                                         

This marks the length of time since a particular credit line was established.  A seasoned borrower is stronger in this area.

Type of Credit: 10% impact                                                                                                                                              

A mix of auto loans, credit cards and mortgages is the ideal mix compared to a concentration of debt from credit cards only.

Inquiries: 10% impact                                                                                                                                                

This quantifies the number of inquiries that have been made on a consumer's credit history within a six month period of time.  Each hard inquiry can cost from 2 to 50 points on a credit score, but the maximum number of inquiries that will reduce the score is 10.  In other words, 11 or more inquiries in a six month period will have no farther impact on the borrower's credit score.

Remember, a computer that's not taking any personal factors into consideration calculates these scores.  When a credit report is generated, it is simply today's snapshot of the borrower's credit profile.  This can fluctuate dramatically within the course of a week, depending on the individual's own activities.  The borrower should be made aware of this when they enter into the loan process, and know that it's not in their best interest to go out on a shopping spree.  They need to make sure they are not creating a negative impact on the score while the lender is reviewing their file.

Secondly, it is often beneficial to compile a Tri-Merge Credit Report.  This combines the scores provided by Fair-Isaac (FICO) with the score generated by TransUnion (Empirica) and the Beacon Score produced by Equifax.  The lender should be provided with this rounded profile because these three scoring systems can vary in their results.  The lender is going to look at the middle score and throw out the other two.  In many cases, this works to the borrower's advantage.