Sunday May 22, 2022

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Understand Your Credit Score
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When you're applying for a home loan or refinance, auto loan, or even credit cards, it pays to know your credit!  Why? Because the information in your credit report determines your three-digit credit score, and your credit score can cost you or save you tens of thousands of dollars or more!

What are the elements of a credit report and how are they "weighted" to determine your credit score?

In addition to including your personal information (name, address, date of birth, social security number, etc), your credit report includes information regarding:

  • Your Payment History
    This is a record of your payments to creditors. This accounts for roughly 35% of your credit score. It includes on-time or late payment status. The number of accounts past due, and the length of time the account remained unpaid also factor into your credit score. Your payment history may also show a "public record" on your file such as a bankruptcy, lien, or judgment against you. A positive, on-time payment pattern will help boost your credit score.
  • Your Amount of Outstanding Debt
    How much debt are you carrying? This accounts for roughly 30% of your credit score. Typically, debt balances that are in excess of 50% of your credit limit will have a negative effect on your credit score. If you maintain considerably lower balances (up to 30% of your available credit), this should have a positive effect on your credit score.
  • Your Length of Credit History
    Lenders typically look favorably upon individuals who have a credit history that is well established. Although this only accounts for roughly 15% of your credit score, it still plays an important role in forming your credit score. This may mean that you do not want to close an old account, especially if you're getting ready to apply for a loan. By closing an old account, and reducing the amount of credit history demonstrated on your credit report, you could negatively impact your credit score.
  • How Much "New Credit" Do You Have?
    Applying for too much "new credit" can harm your credit score. This "new credit" category accounts for roughly 10% of your credit score. When you apply for credit and a business checks your credit score, this can cause a "credit inquiry" on your credit report which can lower your score slightly. This is termed a "hard inquiry". Too many "hard inquiries" within a short period of time can be a sign to lenders that you are overextending yourself by taking on too much credit. It is important to note that when you check your credit score, or you receive pre-approved offers in the mail, the inquiry that results is termed a "soft" inquiry and will not lower your score.
  • What types of credit do you use?
    This accounts for roughly 10% of your credit score. Do you have a balanced mix of loans (mortgage, auto, etc) and credit card (retail) accounts.
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