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.
- PAYMENT HISTORY – 35% IMPACT
- 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
- 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
- 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
- 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
- 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.