Facts About Your Credit Score
The basics:
In the wake of the credit crisis, lenders have become much pickier about whom they lend to. Here are some basic facts that will help potential borrowers understand what they face.
The measurement that most lenders use to assess applicants' credit risk is the FICO score developed by Fair Isaac Corp. The score ranges from 300 to 850.
There's not one FICO score. Buyers have three: one for each of the three credit bureaus, Experian, TransUnion, and Equifax.
Each credit score is based on information the credit bureau keeps on file. Since credit bureaus don't share their data with one another, the three FICO scores may differ, sometimes by as much as 100 points.
The components of a FICO score are:
- Payment history: 35 percent
- Amounts owed: 30 percent
- Length of credit history: 15 percent
- New credit: 10 percent
- Types of credit used: 10 percent
A consumer with a 580 credit score might qualify under FHA requirements, but, generally, in order to qualify for a prime loan, a borrower must have a credit score above 620 for a conventional loan at all and above 720 for a loan at terms and rates most borrowers would consider desirable
Additional Info:
1. Frequent delinquent payments are more damaging than an isolated delinquency. Also, sporadic late payments (a 30 day late last month and a 30 day late three months ago) are more damaging than successive late payments, (successive 30 day late payments are called a “rolling 30” and it counts as only one late) because of how it reflects on a person's financial habits.
2. Having more than three open bank cards lowers your score. Having less than three bank cards will not give you as high a score as having three. Therefore, three open bank cards, all with low balances, is one way to raise your score. But do not close any open accounts after they are open, unless the company terms are no longer favorable. It will reduce the amount of available credit and have a negative influence on overall debt ratios. A person who has $50,000.00 in available credit and is using $30,000.00 will have lower scores after they close several “unused” accounts and only have $40,000.00 in available credit.
3. Late payments and collection accounts have a major negative impact on the credit score. Collections, or charge-offs, are especially damaging. Even after a collection has been paid off with a zero balance, the fact that it is on your report will significantly lower your score for several years. A ten dollar collection last month can be more damaging than a three year old bankruptcy!
4. The most emphasis is placed on recent information. For example, a late payment one month ago is weightier than a late payment a year ago. Therefore, time will gradually 'heal' bad credit; every month that passes helps.
5. How severely delinquent the payment was (30 days, 60 days, 90 days) affects the credit score. The more severe the delinquency, the more damaging it is to the score. (Late payments less than 30 days late are not reported.) Utility companies do not report late payments unless they go to collection. Therefore if you have to be late on something, be late with the utilities! (Be sure to make satisfactory arrangements to pay the account current.)
6. Chapter 7 and Chapter 13 bankruptcies affect your credit score equally. More points are not awarded for debt reorganization Chapter 13.
7. The longer an account is open and the more payments that have been made on time, the more points you earn. Thus, taking a new auto loan (installment credit) will lower your score at first, because longevity has not been established and because the balance in proportion to the limit is high. (People buying houses should wait to take out a loan for furniture, appliances, auto, SUV, boat, Jet Ski, etc. until after their home loan is closed.)
8. Credit balances up to or close to the limit will lower your score, even if all payments have been on time. Therefore, it is better to have several accounts with small balances than one or two accounts with large balances. (Balances should be 0% - 30% of the allowed limit for the best score.) There is a modest hit to score at a 50% balance compared to credit limit. There is a major hit to score at a 75% or higher balance. If balances are carried for some time at 75% or higher it will be impossible to maintain scores over 700.
9. SPECIAL NOTE! Accounts that are “maxed out” each month, (even if they are paid off each month) will hurt a score. The system will only recognize balances under 30% AT THE TIME OF THE CREDIT PULL for the best score! The solution is to get a limit raised, and only borrow up to the 30% limit.
10. The proportion of your debt to your income is not counted, because it is illegal to consider income; therefore, people with high incomes who can easily afford to carry a lot of debt will be docked on their scores the same as others for having high balances and/or more than three bank accounts.
11. When applying for a mortgage loan, mortgage payment history is considered far more important than credit cards or installment loans.
12. Credit card payment history (revolving credit) is more important than installment loans. Therefore, it is better to pay down credit cards before paying down installment or auto loans.
13. Debt management companies such as Consumer Credit Counseling reported on your file may significantly lower your credit score. Some creditors will report your payments as being late the entire time you are n CCC because they do not receive full payments each month. Some lenders consider being in a debt management program like being in a self-made chapter 13 bankruptcy.
14. Having no revolving credit accounts at all will hurt your score.
15. Having a finance company loan on your credit report will lower your credit score. Having two finance company loans is worse; having three or more is worse still. (A regular auto loan is not considered to be in this category of loan.) Beware of furniture companies, electronics companies, lumber yards and others who set up financing with a finance company. Finance company loans are designed for people who cannot get funds elsewhere, hence the expression "hard money loans."
16. Repossession, including a voluntary repossession, is a major negative and will damage your credit significantly. Whose fault it was has no bearing on a credit score or in a loan approval.
17. A mortgage foreclosure is even more credit damaging than a bankruptcy in the eyes of a mortgage lender.
18. Closing off all accounts and having no open credit will lower your score. Keep long-standing accounts open to improve your score (even with zero balance). Use revolving credit at least every six months. Don’t pay cash when you can use credit. Just pay off the account each month. Carrying balances on revolving accounts does not build credit. Paying on time each month builds the credit score.
19. You can rate shop without hurting your score: All mortgage loan inquiries and all auto loan inquiries within a 14-day period are treated as one inquiry. It is assumed that you are shopping for just one mortgage or just one automobile at a time. The exception to this can occur when some of your inquiries are before and some are after the date of the credit bureaus' monthly update. (Usually around the third week of the month). Most updates occur starting the 24th or the 25th of the month
20. Multiple inquires from credit card companies (revolving credit) will lower your score. A person may be looking to open several lines of credit and significantly increase their debt. The trap is "apply for an account and get 20% off your purchase." Yes you got a "deal" and you "dinged" your credit at the same time! Three in a month will burn your score! |