The Five Factors of Credit Scoring

Credit scores are comprised of five factors.  Points are awarded for each component, and a high score is most favorable.  The factors are listed below in order of importance.

  1. PAYMENT HISTORY – 35% IMPACT5-factors-of-credit-scoring-Graph-260x300
    • Paying debt on time and in full has the greatest positive impact on your credit score
    • Late payments, judgments and charge-offs all have a negative impact
    • Missing a high payment will have a more severe impact than missing a low payment
    • Delinquencies that have occurred in the last two years carry more weight than older items
  2. OUTSTANDING CREDIT BALANCES – 30% IMPACT
    • This factor marks the ratio between the outstanding balance and available credit
    • Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home
  3. CREDIT HISTORY – 15% IMPACT
    • This portion of the credit score indicates the length of time since a particular credit line was established
    • A seasoned borrower will always be stronger in these areas
  4. TYPE OF CREDIT – 10% IMPACT
    • A mix of auto loans, credit cards and mortgages is more positive than a concentration of debt from credit cards only
  5. INQUIRIES – 10% IMPACT
    • This percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a six-month period.
    • Each hard inquiry can cost from two to 25 points on a credit score, but the maximum number of inquiries that will reduce the score is ten.
    • In other words, 11 or more inquiries within a six-month period will have no further impact on the borrower’s credit score.
    • Note that if you run a credit report on yourself, it will have no affect on your score.

Remember that the credit score is a computerized calculation.  Personal factors are not taken into consideration when a credit report is generated.  It is merely a snapshot of today’s credit profile for any given borrower, and it can fluctuate dramatically within the course of a week.