What factors make up your Credit Score?

What parts of your credit report are more important than others.

The formulas used by the credit reporting bureaus are complex and take a great deal of imformation in to calculate your scores. The best way to understand what your individual scores mean is to learn which items on your report have a big effect. It also helps to know what types of accounts are better than others.

Credit Reporting Agencies

There are 3 credit reporting agencies, Equifax, Experian and Transunion. Each one reports their own FICO (R) score to the lender. Scoring ranges from 300 at the low end to 850 at the high end. Industry experts report that the national average is approximately 720.

How is a credit score calculated?

The fundamental concept of the score is to detect the likelihood of you having a 90 day late payment (or 3 months behind). To get to this point the formula looks at 5 different aspects of your credit report.

Payment history

This has the highest weighting in the scoring system. It takes into account the payment history on each and every account on your report. Recency of payments is also incorporated so a late payment within one month of the credit inquiry affects you more than a late payment 6 months ago. It also looks at trends as in having multiple late payments or more than 1 month past due on an account.
The worst item to have is a collection account. This is when the creditor basically gave up trying to collect the amount owed and placed it with a collection agency. Regardless of the amount owed a collection is a big negative indicator on your credit.

Balance Utilization

Here it will calculate the balance owed on account against the available credit. For instance if you have $1,000 credit limit on your card and owed $900 that will reflect negatively even if there is spotless payment history. Also installment loan balances are compared to the original balance. So a quick way to possibly increase your score is to pay down a credit card or increase the credit limit.

Credit History

Your report shows the date each account was opened and the number of total months it has been reporting. So the longer the history of multiple accounts the stronger your score will be.

Inquiries and/or New Credit

This part of the scoring has been the most debated. Most people are under the impression that multiple credit inquiries drop your score. Well if the inquiries are done by a mortgage lender and are within 1 month of each other it should not have as great an effect as you would think. The more damaging inquiries are the ones from credit card companies, car loan companies, retail stores, etc. Those affect your score more than the mortgage requests. In addition to the inquiries the types of new credit you have obtained, so if you applied and received a new credit card, car loan, or another type of debt that could swing your score.

Types of accounts in use

There is a heirarchy of types to go by. Mortgages are the top, they are typically the highest balance and payment and they are also the toughest to obtain of all the accounts on your report. Next are installment loans (car, personal and student loans) these have fixed payments and rates. Also there is a definite end date for them. Third type are revolving accounts. Credit cards and retail charge accounts where the interest can change, they only require a minimum payment, and you have the ability to increase the balance. These accounts have less certainty for lenders and credit scoring. Even if you owe very little on a credit card, you still have the ability to charge up to the max limit. This is where the old adage of not having too many open credit card accounts comes into play.

In addition to the above categories if you have any Public Records (i.e. bankruptcies, judgements or liens) that show up on your report they will obviously have a negative effect on your score. But remember the longer time passes after these show up or you pay them off your credit score will repair itself.

Now that you have an idea of what can effect your credit you will be prepared when it comes time to purchase or refinance.. You can also review your situation without a credit report simply by staying on time with your monthly obligations. If you feel your score is lower than it should be please contact one of our lenders for advise on how to repair it.

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