Understanding your Credit Score

Understanding Your Credit Score:

Your credit scores usually determine the price you pay for your mortgage and other loans. Credit scores range from 350 to 850, with 850 being the best possible credit score that you could receive, and 350 being the worst possible credit score. There are five factors that determine your credit score:

#1: Your Payment History - 35% impact on your credit score

Paying debt on time and in full has a positive impact. Late payments, judgments,
charge-offs, collection accounts and bankruptcies have a negative impact. The credit scoring systems evaluate how many late payments you have had and whether they were 30, 60 or 90 days late, or whether they are currently in default, with default being the worst situation. Additionally the systems look at whether the late payments were consecutive.

#2: The Balance You Owe vs. Your Available Credit Lines - 30% impact on your credit score

Keeping your credit balances below 50% of your available limit is very important. Keeping your balances below 30% of your available credit is even better. This is perhaps the single most misunderstood part of credit scoring. It is not how much you owe, but how much you owe compared to what you are able to borrow that matters.

#3: Your Credit History - 15% impact on your credit score

The longer your accounts have been opened, the higher your score will be; newly opened accounts will bring your score down.

#4: The type of credit that you have open - 10% impact on your score

A good mixture of auto loans and leases, credit cards and mortgages is always best. Too many credit cards is not a good thing; having 3-5 revolving credit cards open is optimal.

#5: The number of recent inquiries that have been made by creditors - 10% impact on your credit score

Inquiries affect the score for one year from the time the inquiry is made. Personal inquiries do not count toward your score. The score is only affected if potential creditors, such as credit card companies, auto finance companies, department stores and mortgage companies, check your credit. This is because the scoring system assumes that if you have many recent inquiries, you must be strapped for money and in some type of "panic" mode, trying to get credit wherever you can find it.