Payment History
Amounts Owed
Length of Credit
New Credit
Type of Credit
Amounts Owed
Length of Credit
New Credit
Type of Credit
What Makes up a
Credit Score?
Credit Score?
There are five primary factors that go into a credit score:
If you glance at the pie chart to the right, you will see the
weight calculation given to each of these factors. As would
be expected, payment history is greater than one-third of the
equation. Let's examine these factors in further detail.
Payment History
Payment history is just what you think it is, a record of all
the payments on all of your revolving and installment debts.
What most people fail to realize, however, is that just
because a company charges you a late fee because you
missed the payment date, that doesn't mean that there will be
a late on your credit report. You see, payment history is
broken down as follows: 30 day lates, 60 day lates, 90 day
lates, charged-off balances, and public records.
So, let's give an example. You have a MasterCard payment
due on July 1. You don't get the payment in to MasterCard
until July 28. Technically, you are late, and you will likely
have to pay a late charge of roughly $30 as a result. But,
you are not greater than 30-days late. Therefore, this late
payment will not adversely affect your credit score.
There is no formula that will tell you just how many points
your FICO score will drop given the amount of 30-day lates
you have.
- Payment History
- Amounts Owed
- Length of Credit
- New Credit
- Type of Credit
If you glance at the pie chart to the right, you will see the
weight calculation given to each of these factors. As would
be expected, payment history is greater than one-third of the
equation. Let's examine these factors in further detail.
Payment History
Payment history is just what you think it is, a record of all
the payments on all of your revolving and installment debts.
What most people fail to realize, however, is that just
because a company charges you a late fee because you
missed the payment date, that doesn't mean that there will be
a late on your credit report. You see, payment history is
broken down as follows: 30 day lates, 60 day lates, 90 day
lates, charged-off balances, and public records.
So, let's give an example. You have a MasterCard payment
due on July 1. You don't get the payment in to MasterCard
until July 28. Technically, you are late, and you will likely
have to pay a late charge of roughly $30 as a result. But,
you are not greater than 30-days late. Therefore, this late
payment will not adversely affect your credit score.
There is no formula that will tell you just how many points
your FICO score will drop given the amount of 30-day lates
you have.
Amounts Owed
Have you ever heard of the term debt-to-capacity?
Debt-to-capacity is a ratio that mortgage brokers, banks,
insurance companies, and any other firm will evaluate when
underwriting your loan application. This ratio simply
accumulates your total outstanding debt and divides it by
your total revolving credit limit. So if you have 5 credit
cards with limits totaling $40,000, and your outstanding
balance on these cards is $32,000, then you have an 80%
debt-to-capacity ratio. This would not place you in a
favorable situation, and your FICO score would likely be
negatively impacted. Like most factors that go into the
calculation of a credit score, this is another one of those,
"Sure we could tell ya just how many points your score will
drop with each 10% increase in your ratio...but if we told
ya, we'd have to kill ya." Credit reporting is subjective.
Get used to not knowing the exact science behind their art.
A great way to raise your credit score is to lower this
number. Now you may not be able to lower that number
by simply paying off your debt. However, getting approved
for another credit card would lower this ratio. But our
credit card situation doesn't live in a vacuum. If you were
to engage in this practice, it would adversely affect our next
two factors.
The safest principal to practice (if you are comfortable with
it, of course) is getting into a habit of not closing credit
accounts. Each time you close an account, this ratio goes
up, and you run the risk of your score going down as a
result.
Have you ever heard of the term debt-to-capacity?
Debt-to-capacity is a ratio that mortgage brokers, banks,
insurance companies, and any other firm will evaluate when
underwriting your loan application. This ratio simply
accumulates your total outstanding debt and divides it by
your total revolving credit limit. So if you have 5 credit
cards with limits totaling $40,000, and your outstanding
balance on these cards is $32,000, then you have an 80%
debt-to-capacity ratio. This would not place you in a
favorable situation, and your FICO score would likely be
negatively impacted. Like most factors that go into the
calculation of a credit score, this is another one of those,
"Sure we could tell ya just how many points your score will
drop with each 10% increase in your ratio...but if we told
ya, we'd have to kill ya." Credit reporting is subjective.
Get used to not knowing the exact science behind their art.
A great way to raise your credit score is to lower this
number. Now you may not be able to lower that number
by simply paying off your debt. However, getting approved
for another credit card would lower this ratio. But our
credit card situation doesn't live in a vacuum. If you were
to engage in this practice, it would adversely affect our next
two factors.
The safest principal to practice (if you are comfortable with
it, of course) is getting into a habit of not closing credit
accounts. Each time you close an account, this ratio goes
up, and you run the risk of your score going down as a
result.
Length of Credit
As a student in high school and college, I never had a car.
It was simply a luxury that I didn't get to experience. I had
time for me to share my personal stories with you. What
does this have to do with length of credit? Well, here's the
important part of the story. When I graduated college, I
entered the "real world" with a new job and no
transportation. Boy, were the car salesmen salivating at
me, as I showed up desperately needing a car so I could go
to work the next day.
I left the dealership with a nice red, Chevy Cavalier that
day. Needless to say, I wasn't too cognizant of the details
as I was new to the credit game. But when I told my
father about the terms, he almost had a heart-attack. You
are paying 22.99% interest?! I didn't give it any thought,
but looking back on it now, it reaffirms the simple truth that
if you have no credit history, lenders are not going to give
you the benefit of the doubt! Think of it and put yourself in
their shoes...if you were lending money to someone who
had no documented credit history, would you give them a
favorable rate?
One of the best things you can do for your children, if you
have them, is to get them a credit card when they turn 16.
Yes, you will think I am crazy for recommending this.
However, nearly all credit card companies now allow you
to set a controlled limit for a minor. It can be as low as
$100 in most cases. Enabling them to get that credit
history built up at such a young age could be the difference
between them qualifying for the 2.99% promotional rate, or
driving off of the lot with a 22.99% interest rate!
New Credit
New credit is just what you would imagine, credit that you
have initiated most recently to the date of your report. It
also accounts for recent inquiries into your credit. So if
you are shopping for car insurance, and you allow seven
different companies to access your credit (while price
shopping), these seven hits will likely lower your credit
score. While it may not be much, it may be enough to raise
your interest rate 10-25 basis points (1 basis point equals
0.01%).
As with all accounts, you want to ensure that there is no
late activity on your most recently established credit. If
there is, a company will read this as believing that you have
a difficult time meeting your obligations. After all, your
most recent behavior is what they place the most emphasis
on when underwriting your application. If the recent trend
shows that you aren't paying your bills, why would they
expect these habits to change now?
As a student in high school and college, I never had a car.
It was simply a luxury that I didn't get to experience. I had
time for me to share my personal stories with you. What
does this have to do with length of credit? Well, here's the
important part of the story. When I graduated college, I
entered the "real world" with a new job and no
transportation. Boy, were the car salesmen salivating at
me, as I showed up desperately needing a car so I could go
to work the next day.
I left the dealership with a nice red, Chevy Cavalier that
day. Needless to say, I wasn't too cognizant of the details
as I was new to the credit game. But when I told my
father about the terms, he almost had a heart-attack. You
are paying 22.99% interest?! I didn't give it any thought,
but looking back on it now, it reaffirms the simple truth that
if you have no credit history, lenders are not going to give
you the benefit of the doubt! Think of it and put yourself in
their shoes...if you were lending money to someone who
had no documented credit history, would you give them a
favorable rate?
One of the best things you can do for your children, if you
have them, is to get them a credit card when they turn 16.
Yes, you will think I am crazy for recommending this.
However, nearly all credit card companies now allow you
to set a controlled limit for a minor. It can be as low as
$100 in most cases. Enabling them to get that credit
history built up at such a young age could be the difference
between them qualifying for the 2.99% promotional rate, or
driving off of the lot with a 22.99% interest rate!
New Credit
New credit is just what you would imagine, credit that you
have initiated most recently to the date of your report. It
also accounts for recent inquiries into your credit. So if
you are shopping for car insurance, and you allow seven
different companies to access your credit (while price
shopping), these seven hits will likely lower your credit
score. While it may not be much, it may be enough to raise
your interest rate 10-25 basis points (1 basis point equals
0.01%).
As with all accounts, you want to ensure that there is no
late activity on your most recently established credit. If
there is, a company will read this as believing that you have
a difficult time meeting your obligations. After all, your
most recent behavior is what they place the most emphasis
on when underwriting your application. If the recent trend
shows that you aren't paying your bills, why would they
expect these habits to change now?
We hinted at this briefly when looking at payment history.
So what types of credit are out there? There are three
primary types:
Revolving lines of credit are basically credit cards. These
accounts give you a high dollar limit, and you can charge
up to that limit and no further. As you pay down the
balance, you can redraw upon that revolving line. If you
have a credit card, you know how a revolving line of credit
works.
An installment loan is often thought of as a car loan.
Installment loans are fixed term, usually fixed rate, and
fixed payment.
Mortgage loans are usually installment loans as well,
although if you have an adjustable-rate mortgage (ARM) or
an Option ARM, payments are subject to change when the
loan re-prices.
Ideally you want to have a good mix of these on your credit
report. One of the strongest things you can do to your
credit position is buy a house. Now, don't get me wrong, I
didn't say that you can't have good credit without a house.
I said obtaining a house definitely strengthens your credit
position, assuming you are making timely payments. If you
were to pair your mortgage with a couple of installment
loans, and perhaps 5 credit cards, you would have a pretty
good credit picture assuming your payments are timely and
you are not maxing out your credit on the credit cards.
Other Notes
Remember - these factors are all inter-twined. Your score
will never depend solely upon one factor. Also, your credit
score only takes into account that which is on your credit
report. This is why it is imperative to check your credit
report on an at least semi-annual basis. With identity
theft continually being present in today's world, you must
ensure that your information is both accurate and timely.
Let's say you had an account that you've been current on
for 60 straight months, and it didn't show on your report.
Your score would likely be lower than it should actually be!
So what types of credit are out there? There are three
primary types:
- Revolving Credit
- Installment Loans
- Mortgage Loans
Revolving lines of credit are basically credit cards. These
accounts give you a high dollar limit, and you can charge
up to that limit and no further. As you pay down the
balance, you can redraw upon that revolving line. If you
have a credit card, you know how a revolving line of credit
works.
An installment loan is often thought of as a car loan.
Installment loans are fixed term, usually fixed rate, and
fixed payment.
Mortgage loans are usually installment loans as well,
although if you have an adjustable-rate mortgage (ARM) or
an Option ARM, payments are subject to change when the
loan re-prices.
Ideally you want to have a good mix of these on your credit
report. One of the strongest things you can do to your
credit position is buy a house. Now, don't get me wrong, I
didn't say that you can't have good credit without a house.
I said obtaining a house definitely strengthens your credit
position, assuming you are making timely payments. If you
were to pair your mortgage with a couple of installment
loans, and perhaps 5 credit cards, you would have a pretty
good credit picture assuming your payments are timely and
you are not maxing out your credit on the credit cards.
Other Notes
Remember - these factors are all inter-twined. Your score
will never depend solely upon one factor. Also, your credit
score only takes into account that which is on your credit
report. This is why it is imperative to check your credit
report on an at least semi-annual basis. With identity
theft continually being present in today's world, you must
ensure that your information is both accurate and timely.
Let's say you had an account that you've been current on
for 60 straight months, and it didn't show on your report.
Your score would likely be lower than it should actually be!
My Financial Profile - MyFinPro.com
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general public!
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