Credit Scores: What Are They Good For?
The Elements of Credit Scores
A credit score rating is an extremely important financial tool. It provides access to the financing you need in order to buy a car, a home, or pay for college tuition, among other things. Since higher scores equate to lower costs and vice versa, it’s vital to understand the factors involved in calculating your score. Here are the five elements that make up a credit score, in order of importance:
Payment History: 35% impact. Paying debt on time has a positive impact. Late payments, judgments, and charge-offs have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.
When applying for a mortgage, every point in your credit score can make a big difference. So don’t make any major financial or credit decisions – even paying off an old debt or delinquency – without first discussing it with your mortgage professional.
Outstanding Credit Balances: 30% impact. This factor marks the ratio between the outstanding balance and available credit. Ideally, consumers should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when planning to enter into a loan transaction within 3-6 months.
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.
Mix of Credit: 10% impact. A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards alone.
Inquiries: 10% impact. This quantifies the number of inquiries (or requests for credit) that have been made on a consumer’s credit history within a 6-12 month period. Each individual inquiry – up to 10 – can hurt your credit score by as much as 5 to 30 points. Any additional inquiries thereafter will not affect your credit score.
In other words, don’t start the loan process until you’re ready to act. Otherwise each individual credit inquiry could cost you. However, scoring models have now been adjusted to count multiple “hard” inquiries within a 45-day period as a single request. So, when you’re ready, your credit will be too.
Should you have any questions about this post, or about credit and credit scoring in general, please call me (208-880-0316) directly. I’m here to help!
Eric Leigh, Mortgage Consultant
Eric [at] EricsLoans [dot] com
NMLS: #65666
Posted on December 21, 2011, in Credit Scoring and tagged credit inquiries, credit score, debt ratio, history, payment history. Bookmark the permalink. 2 Comments.
Very useful information here Eric, thank you for sharing your vast knowledge base. I still have a hard time understanding the whole thing, especially why it’s so hard to rebuild after a life altering event. My thoughts are if I HAVE to have credit to purchase anything i.e. a car, a home etc, but can’t get any because of the past, what’s the point? I think the whole system needs a serious revamping…for example: a person with a lower credit score has to pay a higher interest rate, therefore increasing payments, which then they can’t afford and the whole cycle repeats…bad credit, high interest rates, no money to make the payment, reposession, forclosure…repeat. It’s very punishing to those who need to “rebuild”.
Hi Mandi
Thanks for the comment. I would say…it’s not “that hard” to rebuild after life-altering events. It “could” be hard, depending on how you are trying to rebuild the credit. Secured credit cards are a great way to rebuild, and some banks even offer ‘credit builder installment loans’ that report to all three credit bureaus. I’d be happy to talk to you in further about these ways that can be used to rebuild credit…just let me know. To your other point, I would agree…the system does have some very serious shortcomings. Just know that I am here to help and advise you if you need it. Thanks again for taking the time to comment…I appreciate it! See you around the blog!
On Your Team
Eric