Credit in this case does not mean “Credit Card”, it means how you borrow money and how you repay it. Lets go over some brief terminology and general points.
Payment History counts as 35% of your score (we are at 35% of 100%)
We all know it. If you miss a payment, it shows on your credit. The problem is, this is one of the things scrutinized closest. This is the largest factor determined on your credit score. The number of unpaid bills you have, any collection accounts, or bankruptcies etc…impacts your score. And the worst part is the more recent the problem (in comparison to when the report was pulled by a creditor to issue credit), the lower your score might go.
The credit model’s main focus for score. In fact, even something as significant as a 30 day late payment can have a tremendous negative impact on your score if it occurred within the last few months. Things to really watch out for are repeat late payments. If you have a late payment from 5 years ago, and another one from 1 year ago, it’s possible that the FICO scoring might predict that you will have a late payment again since you now have a history of it.
One simple analogy that most people can relate to is car insurance. If you get in an accident 5 years ago and again recently, then we all know your insurance rates go up. They go up because you are a higher risk in that you have a repeated pattern of accidents. So make your payments on time if you have had late payments in the past, otherwise, they might be even more damaging than if it was just your first late payment ever.
Outstanding Debt counts as 30% of your score (we are at 65% of 100%)
The scoring models look at the balances on your credit to rate you. Since this makes up 30% of the score, that means pay attention to your balances! A good rule of thumb is keep cards below 35% of their limit. Here is a guideline you can keep mental note of when arranging your bills:
Installment Loans (i.e. Mortgages, Car Loans/leases, students loans, etc) – balance is not the major issue since these accounts have a pay off period. However, if you are late on an installment note, your credit may be impacted negatively.
Revolving accounts (i.e. Credit Cards, store cards, etc…) have revolving terms, so they get analyzed based on balance. Compare your balance to the card limit:
–higher than limit = Ultimate Bad- (probably means you have late fees, or you charge over your limit.)
–75% to limit= Not good -(indicates you carry high balances)
–50%-75% = this can still impact you negatively in some cases. (There is a phrase we’ve heard “When it’s more than
–50% it’s a debt; below that it’s only ‘extended credit’)
–33% to 40% = getting better. The # of cards like this is your primary focus. Still try to lower the balance
–below 25% of limit= best scenario you can have!
–0% balance = good, but not that good (surprised?!) Well, if you don’t use credit, how can they score you?
The unproven theory is, “That you could potentially charge up all your cards at once”. A history of only using low amounts is better than no history of how much you use….and since Zero can’t be judged…try using your card to buy gas or food and pay it off. During a credit pull, a balance of $200 with a card that has a $1,000 limit is very good! (Assuming you have no late payments of course!)
The Length of time your credit history has existed accounts for 15% of your score (so far, we are at 80% of 100%)
Starting from the date your credit is pulled and going back from there, you are assessed based on the time you have had credit open. The more time of using credit, the better. A longer track record gives insight to your credit habits.
Also, the length of time you have been paying creditors back gives the scoring system the chance to figure out if you have been paying all long or not. Someone with new credit (less than 5 years) might not have enough payment history to give an accurate gauge of how much credit they can handle. Someone with a longer credit history has demonstrated the amount of credit they keep open and the balances they keep.
Recent inquires account for only 10% of your score (now we are at 90% of 100%)
When you apply for credit such as a car loan, credit card, mortgage, etc… a bureau inquiry is made and this is noted on your report. Many inquiries negatively affect your score as it seems you are applying for more debt. The most recent 30 days is the most important when applying for a mortgage, but the most recent 6 months can still impact you greatly. If you are planning on getting a mortgage, watch the number of credit inquiries you do!
The credit bureaus understand that people shop around for the best mortgage rate and need to have their credit pulled by a lender. So having your credit pulled multiple times by different lenders does impact you as long as all the pulls are within a couple weeks of each other.
Now there is a downside to that, if you apply for other credit like credit cards, department store cards, student loans, car loans, etc… during that time, then beware your score could drop significantly! So if you plan on buying the new house & the new car at the same time….our best advice is to WAIT UNTIL AFTER YOU CLOSE on the mortgage before buying a new car and applying for new credit cards. You should also keep in mind that having 3-4 inquiries that you apply for per year for a credit history less than 5 years is a safe average, if you have 5 to 10+ years of credit history, you can probably have closer to 7 or 8 inquiries that you apply for. Have more than that can drop the score by more and more points.
Types of credit in us account for 10% of your score (100% of 100%)
How many trade lines (loans and credit cards) you have opened. Even ones without balances on them. The more you have, the higher the risk. Some news that might be shocking to you is that not all credit cards are looked at equally. Having loans from finance companies or department stores can detract from your score. The flashy buy now for 0% interest and no payments for a year is usually the best giveaway that the card falls into the classification of department store card. Even though unbelievable, statistics have shown that people with department store cards and Finance company loans and cards have the trend of making more late payments than people with a standard credit card from Visa, MasterCard, American Express, Discover, etc…).
However shocking this may sound, if you one of these cards, and a low score, this may be the culprit. You should do more research to find out if your credit card is a Tier 1, Tier 2, or Tier 3 card, where Tier 1 is the best and Tier 3 is the worst.
Examples of finance companies are: Beneficial Finance, Household Bank, American General, etc.
Examples of department store cards range from furniture store cards, to popular shopping mall department store cards. Even home improvement store cards are considered department stores cards.
The 10 Most Frequent RED FLAGS that will damage your Credit:
1) Serious Delinquency
2) Serious Delinquency plus Public Record or Collection Filed
3) Derogatory Public Record or Collection Filed
4) Time since Delinquency is too Recent or Unknown
5) Level of Delinquency on Accounts
6) Amount Owed on Accounts
7) Proportion of Balances to Credit Limits on Revolving Accounts is too High.
8) Length of Time Accounts has been established
9) Too Many Accounts with Balances
10) Number of Accounts with Delinquency
FICO = Your Credit Score
Years ago, the Fair Isaac Company (www.fairisaac.com) created the formula to generate a credit score based on these
5 things:
1. How many credit accounts reported currently open and reported in total
2. The balance reported that you owe on each account individually and in total
3. The number of years reported that you have had credit for
4. The reported frequency of how your bills are paid (on-time, late, or not at all)
5. The type of credit account reported that you have
Their model was named after them: FICO stands for the Fair Isaac Company
CREDITOR = credit card companies, banks, and other companies that issue you loans or credit
BUREAU = the 3 national credit bureaus that report the information on the above 5 items from creditors so that other creditors can see a history on you
CREDIT REPORT = Several sheets of paper printed from a computer system that contains information on you including your name(s), address(es), birth date(s), social security number(s), and account history for the last 10 years that is reported by creditors. Some reports may also contain a FICO (or “credit score”)
So How Does The Credit Reporting System Work?
Each month or so, “creditors” send balance and payment information on your credit cards, loans, and mortgages accounts to the bureaus to store in a central repository of data. The bureaus keep this data stored in massive computer systems. When a creditor (or you) wants to see your credit history, they request a “Credit Report”. By entering your Name, Social Security Number, Address and sometimes Birth date, the computer systems can pull up all the data linked to those numbers almost instantly and print it to an electronic or paper report. Creditors usually do not want to spend excessive time reading and analyzing all the accounts on your credit report since it would take a lot of time and human error could miss something important, so creditors usually request a “FICO” score (or Credit Score).
When the credit report is requested, the FICO formula is run on all the data in your file using the 5 factors above and a score is generated for you. There are two ways to request a FICO, “risk based” and “Non risked based”. The non-risk based score is between 350(bad) and 950(Excellent). The risk based score is between 450(bad) and 850(excellent). Risk based simply means an extra evaluation is done to “predict” if you might possibly have a 90 day or later payment in the next 24 months based on your past history, and current information when compared to all other peers in the U.S. Because of the comparison to other U.S. peers, the equation is always changing month to month. A credit score you had a year ago, or even last month, can change significantly depending on your reported history and everyone else’s reported history. Also, one side note, you are not actually compared to everybody, you are first categorized into 1 of 10 possible “cards”. People a grouped based on similar elements of their data, then the risk based FICO score is calculated.
