Five
Ingredients That Dictate
Your Credit Score
Is your credit score above
620? It should be to considered
desirable when applying for
a loan. When you apply, your
lender will
"rate" or "score" your credit
history. That scores
range between 200 and 850.
How high you score will affect
your ability to obtain the
loan, and determine how much
you will pay for that loan.
Your lender will consult three major credit reporting agencies:
Each of these agencies uses a different algorithm to derive your score, but they all consider a range of data. These are the top five credit data factors that will affect your score on all three reports:
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1. Timeliness of Payment History. Have you paid credit card obligations on time? As much as 35% of your score is determined by your history of paying your credit accounts. On time is good - but past due citations will kill you in this heavily weighted category. Your most recent history will count far more than the distant past. |
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2. Your Total Debt. Do you owe a lot of money to numerous creditors? If you do, the reporting agencies will take that fact as an indication that you are a bad credit risk and and tend to live beyond your means. The amount of total debt you owe will count toward 30% of your score. |
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3. How long is your credit history? A long credit history, especially if you've diligently made payments on time, go a long way to improving your score. 15% of your score is produced on the basis of how long and how well you've used your credit. |
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4. New credit can be bad. Stay clear of new credit if you're considering a mortgage. The reporting agencies consider new credit risky even though you pay promptly. They will look at your very recent history and base 10% of your credit score on your efforts to obtain lines of credit in the past few months. |
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5. Don't
put all your
eggs in one
basket.
The reporting
agencies like
to see
lots of
different types
of credit
— installment
loans (car
loans), apartment
leases, a
small* number
of credit
cards, and
a mortgage,
for example.
Fully 10%
of your score
will be calculated
from the types
of credit
you've obtained. *Although it seems contradictory, having a large number of credit cards (more than three) will actually lower your score, even if you owe nothing on them! Reason - you might actually go out and use them, making repayment of your mortgage more difficult. |
Further study:
- Go here for help on how to improve your credit score.
- Maintaining Good Credit Reaps a Variety of Financial Rewards
- For more on evaluating and understanding your credit score, go to http://www.myfico.com.
- Financial Fitness for Life Quiz [PDF, 327 KB]
- Your Mortgage - Credit Questions and Answers
- For additional information regarding credit, contact the Consumer Data Industry Association.
- Information for
improving your credit
is available from the
National Foundation
for Credit Counseling
or the
American Center for
Credit Education.
Reprinted from
REALTOR® Magazine
Online
by permission of
the NATIONAL ASSOCIATION
OF REALTORS®
Copyright 2005. All rights
reserved.
www.REALTOR.org/realtormag
