I was talking to a mortgage broker friend, Kathy Towers from Reliant Mortgage about credit scores and what factors effect it. She shared these five factors:
- 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 more positive than 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. 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 further impact on the borrower's credit score.
I had not seen it laid out quite like this before, and found this very helpful. Bottom line pay things on time, don't carry too much debt, show history, keep a healty balance, and don't apply for too many new accounts.
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