|
What is factored into credit scores?
How can you influence your score?
Below is a series Express Mortgage, LLC is distributing to the public in March and April 2009 to help educate people on what actually affects a credit score. Use this as a guide to help boost your score!
If you have any questions, simply fill out the form at the bottom of the page and we'll contact you. You're always welcome to call us at 479-530-4569 as well.
Understanding Credit Scores and Factors that Affect Them
With lenders tightening their credit guidelines by the week coupled with the Private Mortgage Insurance companies raising their requirements for eligible borrowers, prospective borrowers need to understand how their credit scores are generated and how to manipulate their scores.
Express Mortgage, LLC is starting a series of emails geared toward educating REALTORS and clients about basic influences and actions that affect credit scores. This series of emails will be broken down into 6 main topics. These are;
- What Makes up a Credit Score
- Top 5 Credit Mistakes.
- Tips for Raising a Credit Score.
- Revolving Credit.
- Derogatory Credit.
- Credit Pulls and Rate Shopping.
What influences a credit score - and how much?
As you can see above, there are 5 main areas that impact credit scores. These are payment
history, amounts owed, length of credit history, new credit and types of credit used.
Amounts owed and payment history make up almost 2/3 of the influence on a credit score.
Creditors love people that make their payments on time.
The item loan officers hear the most panic about isn't even listed on the pie chart above. It's
the dreaded credit pull. While not specifically listed, credit pulls fall under the category of new credit. If you think about it, new credit is a by-product of credit pulls. According to Informative Research, a credit reporting agency used by many lenders, credit pulls have up to a 5% influence of the score.
Credit pulls will be discussed in a future email. However it's worth mentioning now that multiple tri-merge credit reports used by mortgage companies ;pulled in a short time frame (2 weeks or less) will have ZERO impact on potential buyers.
The next 5 emails will get into each factor on the pie chart in more depth.
How does payment history affect a credit score?
Payment history carries the most weight of all the factors.
It's a full 35% of the credit score. Credit bureaus look at -
- How many accounts are paid as agreed?
- Have payments ever been late? If so, how many times?
- How late have they been? More than 30 days late?
According to Experian, the average score of Americans with one 30-day late auto payment is 98 points lower than Americans with no late auto payments!
The month a payment is 30 days late, expect the credit score to drop as much as 80 points - if not more. The farther the late payment is in the history, the better the credit score will be.
The bureaus also look at collections and judgments. These are usually the result of severely delinquent accounts.
We'll cover late payments, collections and judgments in
future emails.
One of the best ways to raise a credit score and keep it high is to pay bills on time every month.
How do balances impact credit scores?
The proportion of balances to credit limits is the 2nd biggest factor in computing credit scores. Credit utilization accounts for 30% of the total credit score.
Credit bureaus determine how many revolving accounts have balances. They also compute the ratio of total balances against credit limits.
If the balances on revolving tradelines are at - or close to - the limit of the accounts, a credit score can drop as much as 60 to 100 points - even if the
accounts are paid on time! If balances are paid down to 35% of the credit limit or lower, the credit score should increase.
Many people will obtain credit cards to boost their credit profile. This is fine as long as the card isn't maxed out.
We often tell clients to use the card once a month to purchase a tank of gas or another item they would buy anyway, then pay it off each month - on time.
This will have a positive impact on a credit score.
How does length of credit history impact credit scores?
How long have the credit accounts been open? Lengthy positive credit history on credit accounts is great for credit profiles.
Should revolving accounts be closed? Not necessarily - especially if they have good payment history over a long period of time. Don't forget, good payment history accounts for 35% of the credit score. Therefore, closing accounts with lengthy pay history gets rid of positive pay history as well as shortens the overall length of credit history - a double-whammy! So if somebody wants to close accounts, close the newest ones.
Has there been recent history on these accounts? While it's nice to have seasoned tradelines, if the accounts are dormant for over 6 months they will cease to have a positive impact on the credit score. Clients' scores have actually disappeared even though they had years of credit history. The accounts sat dormant over 6 month and therefore quit impacting the scores. Use the tradelines on occasion to keep the positive impact of those seasoned trades.
How does new credit impact credit scores?
How many recently opened accounts are reporting to the credit bureaus? Attempting to build good credit by opening several tradelines in a short period of time can actually have the opposite effect. New accounts should be opened gradually over time.
How many recent credit inquiries in the past 90 days are on the credit report? Of course, new tradelines are the by-product of credit inquiries. While a couple of consumer credit inquiries won't hurt, several credit pulls in a short amount of time will have a negative impact as well.
How long has it been since the last credit inquiry? The farther the credit inquiries are in the past, the less negative impact they have on the credit score.
Has positive credit been established since credit problems such as multiple late payments, foreclosures and bankruptcies? Many lenders will look for positive credit since credit problems to show the borrower is willing and able to handle credit obligations. Many times we come across clients with past credit problems. The reaction is to stop using credit and to pay cash for everything. While this is a noble idea, it often hurts the buyers' chances to obtain a mortgage. If buyers have derogatory credit, they should establish good tradelines once back on their feet.
What's in your wallet?
The types of credit used have a 10% impact on credit scores.
So what types of credit are good? Should clients have installment debt, revolving credit or both?
In general, having credit cards and installment loans (and paying timely payments) will raise your credit score. Someone with no credit cards, for example,
tends to be higher risk than someone who has managed credit cards responsibly.
Don't open accounts just to have a better credit mix - it probably won't raise your credit score immediately.
Again, always make payments on time and keep the revolving balances low.
|
