Facts on credit scoring

Conceptions & Misconceptions About Credit Scoring

As the real estate meltdown has come to an end, one thing is certain. Credit scores are here to stay.

This makes understanding what makes up your credit score and how you can improve your score imperative.

First, what are the components of your credit score (models vary from providers):

Payment History (35%)

Payment history is just what it sounds like. How have you handled your obligations? Paying your bills on time is essential for a good credit score. If you have random late payments, your score still may be okay. The type of accounts included in this analysis includes credit cards, installment loans, mortgages, store cards and finance companies.

Payment history portion of your score is also affected by any public records. These include Bankruptcy, foreclosure, liens, collections and judgments. These are considered quite serious and result in significant score reductions.

When looking at late payments, the account will be evaluated on how late it was, the amount owed, how recent the late was and how often you have been late.

Amounts Owed (30%)

The amount owed to creditors can give a lender an indication of your financial health. A borrower who has a number of accounts at or near their credit limit, is a sign that the borrower may be overextended.

Managing the balances on your credit cards becomes an easy way to improve your credit score. It is important to realize that simply paying the card in full monthly will not produce the best score. The balance which appears on your monthly billing statement is what is reported to the credit bureau. If you make it a habit of charging large amounts monthly, you will appear to be maxed out even if you pay the account if full. The key is to never allow you balance to approach its limit. Generally you will find that your credit card limits will influence your score more significantly as the balance rises. In general the thresholds are 10% of the limit has little to no impact, while over 70% will significantly impact your score. And heaven forbid you exceed you limit.

Length of Credit (15%)

The length of time a borrower has had credit influences your score. In the old days, borrowers were frequently advised to close accounts to prepare for a home purchase. This is bad advice. Closing credit accounts will actually drop your credit score. In addition, if one is trying to raise a score, do not pay an installment debt to zero. By doing so the installment debt will be closed and shorten the average length of time your accounts have been open.

Types of Credit (10%)

The types of credit are generally made up of installment, revolving credit cards, store cards and finance company loans. In general it is a good idea to have a mix of revolving verses installment debt as long as they are managed appropriately as described above. The only account that should be avoided is the finance company loans. In all cases, this type of loan will result in lower credit scores.

New Credit (10%)

When you shop for new credit, the lender does a credit inquiry. While these inquiries impact your score, this impact is minimal. It becomes more significant if a number new accounts are opened in a short period of time. This is important because not only are there a number of new inquiries but also you shorten the average length of time your accounts have been open.

Summary

By understanding what goes into the credit score, it becomes easier to assist buyers who need help reaching a minimum qualifying score. When a buyer has a good mix if credit, it is usually relatively easy to find the means for raising scores by 15-20 points in a short period of time. However if the borrower has more significant hurdles, it may become necessary to employ a reputable credit repair specialist. If this is necessary consult with your lender as they can point you to repair companies that produce good results.

As a certified Realtor® for the top-rated Columbus Realty Firm - Vision Realty, with 32 years of dedicated real estate experience, I can help buyers, sellers, investors, short sale sellers and more find, sell or invest in the right property, at the right price, at the right time. Contact me anytime for updates and information on the Columbus OH Real Estate market.

Donald Payne - Vision Realty, Inc. 4608 North High Street Columbus, OH 43214 Toll-free: (866) 510-2223 Cell: (614) 323-4348 DonaldPayne@VisionRealty.com