Understanding Your Credit

Whether you realize it or not, your credit score is affecting your everyday life. We all know that creditors use this score to determine our credit worthiness when we apply for things such as car loans, credit cards, apartment rentals or mortgages. But, did you know that employers use it to determine whether or not they should hire you and insurance companies use it to determine how much you’ll pay on your car insurance?

Bottom line, Your credit score determines your quality of life! Lets take a look at what makes up your credit score...

Here's the breakdown:

Payment History   -   35%

Balances Carried   -   20%

Credit History   -   15%

Mix of Accounts   -   10%

Inquiries   -   10%

Payment History: Having a long history of making payments on time and no missed payments on all credit accounts is one of the most important items lenders look for.

  • Bills Paid As Agreed

  • Most Recent 6 Months

  • Most Weight On Highest Dollar Amount

    -Mortgage

    -Auto Loans

    -Other Large Loans

Balances Carried: This measures the amount you owe relative to the total amount of credit available. Someone closer to maxing out all their credit limits is deemed to be a higher risk of late payments in the future and this can lower their credit score.

  • Keep Balances As Low As Possible

  • Outstanding Balances Versus Credit Limit Affects Credit ScoreFor Example:

 

Credit Card     Balance     Credit Limit

                                            Visa            $10,000     $10,000 (Bad)

                                            Visa            $500          $10,000 (Great)

 

  • High Credit Limit to Balance Ratio = Lower Credit Score

  • Spreading Balances Between Cards  = Higher Credit Score

  • Try To Keep Ratio Under 30%

  • Mortgage / Installment Loans Less Of Factor

Credit History: In general, a credit report containing a list of accounts opened for a long time will help your credit score. The score considers your oldest account and the average age of all accounts.

  • Longer Credit History = Higher Credit Score

  • Long Credit History Paid As Agreed / Positive Impact To Credit Score

  • Never Close Credit Accounts, Especially If You’ve Had A Long History

Mix of Accounts: Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered. 

  • Ideal To Have Installment & Revolving Accounts

  • Mortgage Loan

  • Auto Loan

  • 3 – 5 Credit Cards are OK

  • HELOC Should Be Greater Than $40K Or May Report As Revolving Account Versus Mortgage

Inquiries: Opening several new credit accounts in a short period of time can lower your credit score. Also multiple credit report inquiries can represent a greater risk, but this does NOT include any requests made by you, an employer or by a lender who does so when sending you an unsolicited, "pre-approved" credit offer. Also, to compensate for rate shopping, the score counts multiple inquiries in any 14-day period as just one inquiry.

  • Shopping Around? Pulling Multiple Reports For Mortgage and Auto Purchases = 1 Inquiry Within 14 days (for each).

  • Each Inquiry Averages 5 Points

  • Only First 10 Inquiries Count Each Year

  • After 10, Will Not Affect Credit Score