Credit Scores: The Five Factors of Credit Scoring

A good credit score can mean the difference between a low mortgage rate with conventional financing and a restrictive, higher-rate loan. There are five factors that impact consumer credit scores. They are listed here in order of importance:

1. Paying debt on time and in full has a positive impact, and late payments, judgments and charge-offs have a negative impact.
2. Outstanding credit balances have a 30% impact.
Debt ratio of outstanding balance to available credit is important. Keeping that below 50% is wise and below 30% even wiser. It is never a good idea to close an account: the debt ratio will go up and the number of seasoned lines will decrease. Pay outstanding debt down as close to zero as possible and evenly redistribute the remaining balance among the open lines. The increased interest incurred by moving balance from a 0% card to a 23% card will be minimal relative to what the increased mortgage might be with a low credit score. Hitting the maximums of available credit can be very negative. It may be worth calling and asking the credit company to increase your available credit to lower the debt ratio provided they can do so without a hard credit inquiry.
3. Credit history has a 15% impact.
The length of time a particular credit line has been opened is important. A seasoned borrower is stronger.
4. Type of credit has a 10% impact.
A mix of auto loans, credit cards and mortgages is positive, rather than a concentration in credit cards only.
5. Inquires have a 10% impact.
Hard inquires for credit will negatively impact the score. Auto and mortgage inquires receive special treatment and 20 inquires made in a 14-day period for auto or mortgage will be treated as only 1 inquiry. The maximum number of inquires that will reduce the score is 10. Any inquires beyond that (11+) in a six month period will have no further impact on the borrower. Each hard inquiry can cost 2-50 points on a credit score.

Trade secret tip:
Request that creditors and credit bureaus delete any outstanding debt that is incorrectly charged to you or has yet to be cleared. They have an obligation to react within 30 days. If you choose to pay off an outstanding debt (less than two years old) mark the back of the check “accepting this check is evidence that the transaction is complete and this charge will be deleted from my credit”. You may able to use the cancelled check if the outstanding debt in not removed.

Call Pete Sabine (925) 407-0606 for a free consultation.

RE/MAX C.C. Connection.