Credit post from New west

     We’ve spoken about the Algorithms or Credit Scoring Models that calculate your credit score(s) in past newsletters. Quite frankly, the information can be overwhelming if not plain boring to most people.

     In this issue I thought we’d take a moment to get “back to the basics”. 

     Even though the three major Credit Reporting Agencies, (also known as CRA’s), Equifax, Experian & TransUnion technically use a slightly different scoring model, the basics are still the same.

     The following is a simple outline of credit scoring and the different factors used to calculate your credit score: 

 

 

Graph courtesy of myFICO a division of FairIsaac

 

Payment History- 35% The largest factor!

Amounts Owed-   30%   The most important element here is credit card debt.

Length of Credit History-15% 

New Credit-10%

Types of Credit Used-10%

 

     A couple items of interest here.

Notice that the first two factors equal about 2/3’s of your score!

So simply making timely payments and keeping your revolving debt low will have the biggest impact on your score.

Length of History-this is based upon the months the account has been open and obviously helps increase your score with each monthly payment. Just make sure it’s not over 30 days late! 

Types of Credit Used-This simply means a person should have a good “mix” of credit. In other words a Credit card or two, auto loan and a home loan being the most important. Owning a house vs. renting shows stability in the eyes of the scoring model and thus is the highest rated type of “trade-line”.

Remember, a person doesn’t have to have a lot of trade-lines to have a good credit score! 

 

In the meantime focus on making your payments on time each month & keep your credit card debt below 30%--if possible. Do not pay off credit card balances in full though—you want to show some activity on the account(s). Credit scoring models love to see a 10-20% balance on credit cards! 

 

 

Yours in Credit Education,

 

Thomas R. McKee