There are five factors that make up the credit score. They are listed below in order of importance and impact to a persons credit score:
- Payment History: 35% impact.Paying bills on time and in full has a positive impact. Late payments ("late" means 30 days or more), judgments, collections and charge-offs have a negative impact. Negative items that have occurred in the past two years have a greater impact than older items.
- Outstanding Credit Balances: 30% impact.This is the ratio between the outstanding balance and the credit limit or account limit. To receive the highest credit scores, balances should be kept below 30%. The closer the account balance comes to the credit limit the more negative impact is seen.
- Credit History: 15% impact. How long credit accounts have been open. Older accounts actually have a positive impact on credit scores. This is why older credit cards should not be closed. To get the highest credit scores, use the cards once in a while (keeping balances low) and then put them back away.
- Type of Credit: 10% impact. A mix of credit accounts, car loans, credit cards and mortgages is more positive than just having credit card accounts.
- Inquiries: 10% impact. The number of credit applications that have been made within a six-month period. Each inquiry, or credit application, can cost from 2 to 50 points on a credit score. The maximum number of credit inquiries that will reduce the score in a six-month period is 10. Mortgage applications do not cost points if they are all in the same month.
Credit scores are very "fluid" they can change day to day. That is why it is so important for someone planning on buying a home to see their Loan Consultant as soon as possible. A good, professional loan consultant will set up a plan to get you or your clients on the path to higher credit scores and a new home!
Stay tuned for Credit Scoring, Part lll: Dealing with Challenges
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