Do you ever wonder why your credit scores matter? Have you ever thought about what a credit score really is? How do they come up with these random numbers? Here we will discuss the “makeup” or the face of the scores. There are five different factors/focal points that “makeup” your credit score, and here they are:
- Payment History
- Your payment history is a detailed track record of your credit and every loan or line of credit you have obtained. This has the greatest effect on your FICO score, at a whopping 35%.
- Three different factors are considered when reviewing payment history. First, severity is looked at. This is basically asking “How bad are the delinquiencies?” Next, recency is an issue. Depending on how long ago the consumer defaulted or paid late on an account will determine how many points the score is docked. Lastly, the frequency of the delinquencies is very important. Paying late on a line of credit over and over will absolutely crush your credit scores.
- Amounts Owed
- Be careful here… your balance to credit limit ratio is a HUGE factor in determining your credit score, 30% to be exact! If you have 3 credit cards that are all maxed out, your credit score is going to affected GREATLY. I will let you in on a little trick though. If you pay your accounts down to roughly 30%, you have hit the sweet spot. It shows use of your cards, but also keeps the balances at a percentage under 50% and helps your credit scores build each month, keeping your history stable.
- Length of Credit History
- Starting with this category, we bring down the weight percentage a little bit, but still a substantial amount at 15% of your score. As I said under “Amounts Owed”, your length of credit history DOES hurt you at first, but as the life of the loan or line of credit extends, it begins to help and build your scores. If you have a derogatory account (let’s go with a collection), then it is going to substantially weaken your score for up to 24 months. After the 24 month mark, the detriment to your scores is less, but still has an effect.
- New Credit
- Let’s say you go get an auto loan. You have just put a substantially large amount of debt onto your reports, showing as basically maxed out. This is going to hurt you for the first six months of the life of the loan, but after that, going forward, it will actually help you out, help build your scores, and show more good credit history and good standing, current, open accounts. Also, if you apply for any type of credit, there will be an inquiry for each one on your reports. An excessive number of inquiries labels you as a risk factor, and will typically be denied the credit. The weight of this factor is 10%.
- Types of Credit Used
- I have previously talked about having at least three revolving lines of credit and two installment loans. You want to mix up your accounts with credit cards, retail cards, car loans, mortgage, and so forth. A variety is a good thing… a “healthy” mix! This is also 10% of your score makeup.
Keep up the great work on maintaining great credit, and this economic crunch won’t take such a harsh toll on you and your family!
