Points are awarded for each component of the credit scoring model, and a high score is most favorable. Opinions vary on how many factors are used to establish ones credit score. It has been argued that as many as ten factors are used to determine score, but for our purpose I have listed the top five 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, and 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. Balances higher than 70% will actually have a negative impact on your credit score.
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 this area.
TYPES 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.
Please note that when you run a credit report on yourself, it is called a “soft pull” and will have very little to no affect on your score. In fact, I encourage everyone to check their credit at least every three months for accuracy on open accounts. Check my past posts for a website that allows you to check your own credit once a year for FREE!
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