Credit Score Characteristics

Credit Score Characteristics

1 – CREDIT MIX

Credit Mix- 10%

Including;

•        Number and types of accounts

•        Prevalence and recent trade related data

When creditors assess your capability of borrowing, creditors assess how you manage different types of credit as not all credit is treated the same. 

Consumers tend to prioritize payment of a mortgage or car loan over a credit card or cell phone.

2 – New Credit/Inquiries

New Credit/Inquiries-10%

Including;

•        Volume/type of recent hard inquiries

When a consumer applies for new credit, the inquiry remains on your credit for roughly 3 years, depending on the score.

Research indicates that opening several new credit accounts in a short period of time represents greater risk, particularly if the consumer does not have a long credit history.

3 – Credit History Length

History Length-15%

Including;

•        Time since account open date 

Demonstrating good payment behavior over a longer period statistically means you are more likely to maintain good payment behavior in the future. If you are relatively new to credit usage, there is more uncertainty.

4 – Credit Utilization

Utalization-30%

Including;

•        Number of accounts with balances

–       All or specific accounts

•        Amount of available credit on revolving credit lines

–       All or specific accounts

Utilization is the amount of credit used and the amount of credit available for each credit product and to the consumer overall. It is generally revolving credit products such as a credit card or line of credit.

Balances shouldn’t be carried over monthly above 50%

5 – Credit Payment History

History-35%

Including;

•        Account payment details

•        Number of past due items

•        Severity of delinquency

•        Amount past due on delinquent or collection accounts

The presence of adverse public records or collection items as well as the dates of recent collection, public records, and past due indicators are also factored into the Payment History component.

The fewer late payments, judgments, liens or collections, the better. The more recent late payments worsen your clients’ credit scores.

HOW YOUR CREDIT SCORE IS DETERMINED

35% – Payment History

The biggest portion of your credit score is your ability to make your payments on time. How much you choose to pay towards your credit cards is irrelevant as long as you at least make the minimum payment. Some people think, "I'll skip the payment this month, but I'll make a much larger payment next month to make up for it". NO! The only thing that matters is that you make your keep paying on time. Paying a bill even one day late can possibly result in a late payment being reported. There is not much difference between one day late and twenty days late. qualify LATE is late. Make sure you pay your bills on time. An automatic bill pay system or pre-authorization payment can help a great deal.

30%- How Much You Owe

If you have all your credit cards maxed out, this will negatively affect your score. If possible, try to keep credit card balances under 50% of the limit. The lower, the better. Also, try to control how much debt you carry. You can have a great score and qualifying income; however, if your debt load seems excessive to a lender, you can still get declined, even if everything else qualifies. However, these cases are relatively rare, and your debt would have to be pretty out of control for this to occur.

15%-Length of Credit History

This is the time since each account was opened and the time since its last activity. It is essential to use cards periodically rather than just let them sit. If you don't go to the gym periodically, your muscles will become soft and flabby. The same applies to your credit. Even putting $10 on a credit card once or twice a year will help keep your credit strong and healthy. If only the same could be said for going to the gym! Cards that have been sitting inactive for years will not positively impact your credit whatsoever. Your score may not suffer, but the strength of your credit bureau will. For example, let's say you have three credit cards reporting and haven't used them for a few years. You still may end up getting declined for a mortgage due to a lack of recent credit activity, regardless of how high your score may be.

10%-New Credit

This refers primarily to the number of accounts recently opened and the number of recent inquiries. Don't open up new credit accounts unless you need to. While credit checks will affect credit score, they are only one component in this category. Many believe their credit score will start plummeting when a potential creditor pulls your report. While it does drop, there is usually no need to worry about having someone check your credit, unless your credit is sitting right on the border. For example, if your score is 625 and drops to 610 after a couple of checks, this could mean the difference between qualification and decline. However, if your score is 775 and a couple of checks drop it to 765, then it's 100% irrelevant. On the other end of the stick, if your score is 450, which is pretty bad, then there is no point in worrying about someone checking your score; the damage is done. It doesn't matter if your score is 470 or 420; you still don't qualify for a traditional mortgage. Using a 15-point drop for demonstration purposes only in the above examples. The amount your score drops from each check can vary depending on your circumstances; however, in my experience, it's typically minimal in most situations where credit is healthy.

10% – Mix of trade lines

It is good practice to have a variety of trade lines. For example, instead of having all credit cards, have a line of credit, a credit card, a car loan… etc. Mixing it up shows diversification, which can demonstrate better credit responsibility.