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CREDIT SCORING 101

Some of the most important things you need to know as an adult are not taught at school, and Credit Scoring is one of those things. As a matter of fact, we knew very little ourselves when we started this business 15 years ago. Since then, we have learned how important it is for everyone to understand their own credit scores and know how it affects almost every facet of life— from finding a job, buying a car, obtaining insurance and  ultimately, to financing/purchasing a home.

Top 5 Components of Credit Scoring

  1. Making Payments on Time (35%)
  2. Utilization Ratio (30%)
  3. Duration of Credit History (15%)
  4. Type of Credit (10%)
  5. Credit Inquiries (10%)

1. Making Payments on Time (35%)

  • Late is 30 days after it’s due date.
  • The more recent the late payment, the more it hurts you.
  • It could drop your score as much as 100 points!

2. Utilization Ratio (30%)

  • Pertains to credit cards that have a credit limit.
  • Ideally, never have a balance that is 25% greater than your available credit limit.
  • The more you exceed this threshold, the more negatively it impacts your score.
  • *Note: Calculated monthly at the statement ending date.
*Tips for the Utilization Ratio:
  1. Increase your credit limit to prevent exceeding 25%
  2. Spread your spending over more cards
  3. Pay the bill before the statement end date

3. Duration of Credit History (15%)

  • It’s better to pay it off, but keep it open.
  • Use that card periodically on small purchases.
  • Closing it would wipe out that entire history that was built up.
  • Critical for those with thin credit histories or young people just getting started.

4. Type of Credit (10%)

  • The combination of different types of credit makes up 10% of your score.
  • Important to have major credit cards, ideally 2-3
  • Stay away from Consumer Finance Accounts, such as department store credit cards and interest free deals from electronic or home furnishing stores.
*Good Credit Mixture:
  • Home Loans
  • Car Loans
  • Student Loans
  • Credit Cards

5. Credit Inquiries (10%)

  • Always be mindful of who checks your credit.
  • If shopping for mortgages or cars, most scoring models only count 1 inquiry against you as long as you are within a 30-day period

*Read Also: Credit Repair

Poor credit doesn’t have to be a lifelong condition. For many, lower credit scores can be improved in as little as 6-18 months, so if your credit scores are preventing you from being approved for a mortgage, Contact Us to learn about how to create more buying power in your life.

If you’re thinking about applying for a mortgage but had some questions/concerns regarding your credit, give us a call and we can help evaluate all of your options. Contact Us Today!