Understanding How Credit Scores are Figured

Your credit score is made up of a few factors and considers both positive and negative information. In every category, the scoring model asks questions about your credit report. The answers to these questions determine however many points you earn. A combination of all these points reveals your credit score.

Thirty-five percent of your credit score comes from your payment history, which is the heftiest factor on your credit score. The scoring model will consider questions such as “Are there any late payments?” and “How late were these payments?” Bankruptcies, collection accounts and foreclosures are other examples of negative payment-related information.

Thirty percent of your credit score is amounts owed. The scoring model will examine things like “What’s the total amount of debt?” and “How many accounts are there with balances?” Keeping a low balance-to-limit ratio is the best way to avoid a decreased credit score when it comes to this factor. It’s also important to keep in mind that large payments like mortgages, auto and student loans will have an impact on your credit score as well.

Fifteen percent of your total credit score is determined by your length of credit history. It will ask questions like “What is the time elapsed on both the newest and oldest accounts?” and “When was each account last active?” The longer you’ve had credit history, the more likely it is that your score will be higher.

Ten percent of the score comes from any new credit. It’s important to remember that any time you apply for new credit, the lender does a hard inquiry on your credit score. When you check your own credit score, referred to as a soft inquiry, your credit score is not impacted. Opening new credit should be done sparingly.

The last 10% that makes up your credit score is having different account types. While it may be a small thing, managing different accounts like credit cards, retail accounts and mortgage loans can make a difference in your credit score. You should make sure to open new credit applications periodically and not all at the same time. It’s important to note that your credit score affects what kind of interest rate you are able to get and what loan programs you qualify for. QCBN

By Greg Riordan

Greg Riordan is a Loan Officer with Legacy Mutual Mortgage. For additional information or to get in touch with Greg, visit legacymutual.com/officers/greg-riordan or call 928-427-5156. You may find his office at 325 W Gurley St #102, Prescott, AZ 86301. Greg cares about the people that choose to trust him with the biggest asset in their lives – their home. He will give straight, honest answers with exceptional advice whether you are refinancing your home to pay off debt, lowering your rate, reducing the length of your loan or to purchase your first or next dream home.