The Five Factors Of Credit Scoring And Tips For Keeping Your Credit Score High

The Five Factors Of Credit Scoring And Tips For Keeping Your Credit Score High

Jeff Jensen

We have the benefit of having one of the most effective and responsive mortgage officers in our local Westport Prudential CT Realty office. Jeff Jensen guides us every day through the maze of mortgages and all of the challenges that seem to crop up. Jeff is this month’s guest blogger with important information on your credit score.  Jeff can be reached at (203)981-8282 or at jjensen@cthm.com.

Having a good credit score is a prerequisite for receiving the best interest rates and programs on credit cards, auto loans and home mortgages. The purpose of a credit score is to predict the statistical chance of a consumer being 90 days late within two years.  A credit score is a snapshot of one’s credit at that particular moment in time and can change at any time.

In order to maximize your score you need to be aware of the five components from which your score is determined.  They are listed below with the approximate weight by which they influence your score.  There are three national reporting bureaus Equifax, Transunion and Experion.  Each one of them has multiple scoring models which could cause your score could vary depending on which credit reporting service you use.

Payment history-35%

Revolving debt ratio-30%

Average age of File-15%

Mix of Credit-10%

Inquiries-10%

Payment history is a record of the timeliness of your monthly payments.  Creditors normally report to the bureaus shortly after the end of each month using a form called an E Oscar.  Payments made on time will keep your score high.  A late payment will cause your score to go down for a period of time depending on the category.  Normally late payments affect the score of the following types of accounts in ascending degrees of severity for both the penalty to the score and the period that the y will affect the score.  They are in order below starting with the least severe.

Revolving Credit (credit cards)

Auto Loans

Mortgage Payments

Tax Liens

Foreclosures

Bankruptcy

Your revolving debt ratio measures the amount of outstanding debt you have on a particular account versus the high credit limit for the account.  For instance, if you have a credit card with a $5,000. high limit and have an outstanding balance of $1,200. your score would not be likely to receive a negative change.  If, however, your balance on the same card exceeded 50% of the high limit or $2,500., Your score would be reduced.  You would do well to have your debt shared among several cards and keep all the balances below 50% of the limit and ideally below 10%.  Contrary to what many believe, you are rewarded for having the highest limits with lowest balances.  The thinking is that you are worthy of being afforded the high limit and have the restraint and the sense not use it.  It is wise to periodically call your bank and ask to have your limit increased.  Another little known derogatory is closing credit cards.  You should keep them open and use them every six months or so if they are not your main cards.  One handy trick is to have a business credit card if you charge a lot on cards for your business.  Business cards do not report to credit bureaus on your personal report so the level of utilization is not an issue.

The average age of credit files rewards those with a longer history.   Hang onto old credit cards and your score will improve over time.

The mix of types of credit is an important element of your score.   The best scores will normally be available for those who have three to five credit cards, a mortgage, an auto loan and home equity lines of credit.

The number of credit inquiries can hurt your credit score.  Inquiries can cost between 0 and 50 points.  The average inquiry cost is about 5 points.  Inquiries affect the score for one year.  Some inquiries such as personal, job related, insurance among others do not affect your score.  If, however, you go to store after store and open new credit cards, not only will your score plummet, but you will also incur additional scrutiny when applying for auto loans or mortgages.  Auto and mortgage loans are in a special category.  Because credit bureaus understand that those purchases will affect your cash flow for years to come, additional inquiries do not affect you.  Upon your first inquiry for either one of those loan types, a 45 day window is opened during which you can apply to multiple vendors of the same loan type with impunity.

Keeping your score as high as possible can save you thousands and thousands of dollars over your life time.  It is important to manage the balances and high limits on your credit cards and never pay a bill late.  Even paying a bill after the 15 day grace period could affect your ability to receive future credit.  Scores over 800 are generously rewarded with low rates and attractive programs.

If you need additional assistance with any mortgage-related question or issue, email Jeff Jensen at jjensen@cthm.com

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