How is Your Credit Score Determined?

Your credit score isn’t static; it doesn’t exist until you look at it.  Whenever a creditor – that is, a company to whom you apply for credit – inquires about your credit, Equifax or TransUnion generate a score.  This “officially” ranges from 300 to 900, but scores below 450 are very rate — and indicate significant issues.

Most traditional lending requires at minimum a 600 credit score, but many programs, such as refinancing or purchasing with only 5% down payment, might require higher.

Also, lenders don’t ONLY look at credifico-pie-chart-larget score – they also want to see that things are in line and that you don’t have anything outstanding with other creditors.  It is possible to have a good credit score and to still get declined for a mortgage or other loan, if there are other issues with which they’re uncomfortable.

So when your credit score is generated, what goes into it?

35% – Payment History.  Most obviously, and first, if you don’t pay your bills, or have collections (or bankruptcy or other judgments) against you, that’ll hurt this portion of the score.  It’s the most intuitive part of the score.

35% – Utilization.  Many people assume that as long as you make your payments, that’s sufficient – but it isn’t.  Credit is an inverse reflection of risk; if you show dependency on credit, new creditors will think you’re higher risk, and thus a lower bet for them.  And they don’t like risk.  Keeping significant balances on “revolving” tradelines, such as credit cards or lines of credit, will impact your score.  Ideally, pay off the balance every month before it reports.  One helpful recommendation is to treat credit cards as if the balance is only half of what it really is; if you have a card with a $2000 limit, don’t ever let it go over a $1000 balance.  That’ll help protect you in the long term.

15% – Length of Credit History.  The older your accounts, the longer you’ve handled them well, the better bet you are.  If you’re thinking about chopping up and closing a card, make sure it’s not an old one.  Even that small first credit card you ever had can help protect you.  Put it in a sock drawer and use it once a month, and pay it to $0 balance right away, rather than getting rid of it.

10% – New Credit.  Applying for new credit will actually impact you as well.  If you’ve applied for a lot lately, it can be an indication something is wrong, which is a red flag.  This is where “credit inquiries” or “credit hits” come into play.  They’re not nearly the factor in your score that Payment History or Utilization are, but don’t apply for things unnecessarily.  If it makes sense and you need it, go ahead; credit card applications in order to get a free blanket or beer cooler usually aren’t a good idea.

10% Credit Mix.  Having an appropriate mix of credit would mean not having a wallet full of credit cards, or four vehicle loans.  Creditors want to see stability, and patterns that are abnormal are an indication of instability.  Having a couple of credit card, perhaps a line of credit, and a car loan is normal and reasonable.  Having seven credit cards is not.  That said, you also want to make sure you have sufficient credit; having at least two ‘trade lines’ or cards on a permanent basis will ensure you’re giving creditors adequate proof of your ability to manage credit well.

Note, you’re legally entitled to a copy of your credit report from Equifax or TransUnion..  on paper, by mail.  That doesn’t, however, include the credit scores, which are proprietary information.

If you’ve got any questions, let us know, and we’re glad to help walk you through it.

 

 

 

On February 17th, 2018, posted in: Mortgage Tips by

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