As a former mortgage broker, I’m intimately aware of the role of the role a credit score has in your financial life. If you have a “good” score, you get the best terms and rates. If you have a “bad” score, you’ll be paying more assuming you get the loan at all.
When I first started in mortgage banking (way back in the 1980s), there was no such thing as a credit score. Credit reports were available that compiled payment history information but a real live underwriter reviewed the report and applied her (it was almost always a woman) professional judgment based on her experience and the lender’s guidelines.
Since then, computer algorithms have evolved as they have in almost all things. Now, the credit information is parsed and reviewed by a computer program and your statistical likelihood of default is calculated which then determines what programs, terms and rates will be offered to you.
The “granddaddy” of all credit score systems is the one produced by Fair Issac Corporation. They are as protective of their scoring system as Google is about their search algorithms. But here below, courtesy of Mr. Kim Carpentier of Valley Credit & Credit Coaching (www.ValleyCreditRepair.com), is an outline of what makes up your credit score.
If you have questions about your credit or improving your credit, feel free to call me or call Valley Credit directly.
If you are looking for a copy of your credit report, try www.AnnualCreditReport.com but note that this report does not provide you with any credit score information.
Components of a FICO Score. Your credit score is determined by an algorithm developed by the Fair Issac Corporation (hence its other name of FICO score). Three corporations, called “credit bureaus”, specialize in collecting and reporting on financial histories. Those three companies are Equifax, Experian and TransUnion. While the exact formula used to calculate your credit score is a tightly guarded industry secret, these companies provide general guidelines about financial behavior that can affect your credit score.
Payment History (35%) Thirty-five percent of your credit score is made up by your payment history. This includes late payments, collections, and even bankruptcies and tax liens. Each type of account will stay on your credit report a specified period of time and each type of derogatory will hurt your score differently. A credit repair service may be able to remove accounts that are not 100% accurate OR not 100% verifiable.
Debt Ratio (30%) Your debt ratio is the amount of revolving credit (i.e. credit cards) you owe in relation to the amount of credit you have available. For instance, if your credit limit is $10,000 and your current balance is $2,000, your debt ratio would be 20%. While, ideally, you would have your debt ratio at 0%, we usually recommend you are at least at 20% or lower.
Length of Credit (15%) Your length of credit is how long you have had credit. At face value, this seems like something you couldn’t really do anything to fix. However, there are ways you can hurt yourself here. If you close out your older cards, even if they have higher interest rates, it will hurt your score. The credit scoring model has no memory of credit cards you close: if you close out that fifteen year old card you will get no credit for it!
Types of Credit (10%) Types of credit include revolving, installment and mortgage loans. By having different kinds of credit open, you show creditors you are responsible and able to handle different kinds of responsibilities.
Inquiries (10%) Inquiries are marked on your credit report when you ask for new credit (i.e. when you apply for a home loan). Inquiries made by yourself or for unsolicited offers do not count against your score, but are shown on your report. It is important to note than when searching for a home you are allowed unlimited inquiries over a 45 day period since it is assumed you are rate shopping.