What are the main factors involved in credit scoring?
Your credit score (often called FICO) is impacted by five main factors. We’ve listed each of the factors below and their corresponding impact on your score as a percentage. You’ll also find a brief description of each factor.
- Payment History (35% impact)
- Amounts Owed (30% impact)
- Length of Credit History (15% impact
- New Credit (10% impact)
- Types of Credit Used (10% impact)
Make all your payments on time. If you've fallen on tough times and must choose between being late on a credit card payment or a mortgage payment, always make the mortgage payment on time. Lates on mortgage payments seriously damage credit scores, even more than credit card lates.
Maintain revolving account balances below 30% of the high credit limit at all times. A credit report is a snapshot assessment of a borrower’s ability to repay a debt today. Therefore, you can’t max out revolving accounts every month with the idea that “I’m doing great as long as I pay my credit cards off every month”. One day per month, the creditor will report your balance to the bureaus. If you happen to max out a card one day and pay that balance off the next day, the account still showed maxed out for one day. If the creditor reports to the bureaus on the day your account was fully extended, that account will appear on your credit report as being charged to the max and negatively affect your credit scores. This is because it appears your ability to repay a debt is not as good as it should be. So if you have three cards that you faithfully pay off every month, but the creditors report at times when those cards are charged to the limit, your credit score will reflect that.
Length of Credit History
Keep accounts active and open for an extended period. If you’re going to close some accounts because you have way too many, make sure you close the accounts that you opened most recently. This will preserve the length of your credit history. If you close all your older cards, you‘ve just shortened your credit history and thus negatively affected your scores.
Types of Credit Used
A mix of auto loans, credit cards, and mortgages is positive; rather than a concentration in credit cards only. However, we wouldn't suggest acquiring new credit for the sole purpose of “satisfying” this scoring factor!
Don’t open cards all over town just to save a few bucks here and there. We’ve all experienced purchasing an item and having the offer presented by the cashier to “open a credit card with us today and save 30% of this purchase”. Unless your purchase is for $10,000 and you’re going to save $3,000; resist the temptation of opening that new card. It’s more likely that the hit on your credit score for opening that new card will cost you more in mortgage interest and auto loan interest than the $30 you’re probably saving on that purchase. Limit frequently applying for new credit.
Feel free to contact us with any questions you may have on credit scoring and how to improve your specific scores…we’re happy to help!