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Five Components of Credit Scoring
In order of importance:
- Payment History: Perhaps the most important factor. Repayment of debts on time and in full is a big plus. Late payments, judgements, charge-offs, etc. as you can imagine can significantly reduce one's score. Delinquencies within the most recent 2 year period affect score more than those that are much older.
- Outstanding Credit Balances: Almost as important as payment history. The higher the balance as a percentage of the available limit, the lower the score. Better to keep outstanding credit (particularly revolving debt, such as credit cards) balances below 30% of available.
- Length of Credit History: As it pertains to when credit for a particular debt was established. Generally, the older the debt (i.e. a car loan, mortgage, etc.), the better. Thus, a borrower who has a lengthy history of satisfactory debt repayment, is a lower risk and therefore have a higher score than one who recently opens credit accounts for the first time.
- Type of Credit Used. A variety of different types of debt (installment and revolving - mortgage, car loan and credit cards) is better than a concentration of a particular type of debt obligation (revolving only - credit cards).
- Credit Inquiries. The number of times a credit report is "pulled" for a consumer within the preceding 6 month period can reduce the credit score. More than 10 inquires in a 6 month period should have no further impact on a borrower's credit score. Each inquiry, can reduce a consumer's credit score anywhere from 2 to 50 points.
When it comes time to buying a home, mortgage applicants would be well advised not to go out on a shopping spree for furniture or any other big ticket items. Borrowers should always exercise extreme caution in continuing to manage their credit practices throughout the loan process. |
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