Your Credit Part I

Note: This was originally posted at another blog (mortgagebullet.wordpress.com) but I no longer post at this blog. I am the original author of this post.

You hear so much about it and you know that credit can make the difference in getting a preferred rate or having to deal with a high rate of interest on anything from housing, cars, insurance, and credit cards. But do you know what makes up your credit score?

There are many different types of credit scores. We are going to focus on traditional credit scoring models that are used for mortgage transactions. Scores can range from 300-850. The average credit score in the United States is 677.

Anatomy of a Credit Score
35% - Past Payment Performance
30% - Credit Utilization
15% - Credit History
10% - Type of Credit in Use
10% - Inquiries

Past Payment Performance – is just as it sounds. How well you have you paid your debts? A creditor will report your loan as current as long as you pay your bills within 30 days. Any longer than 30 days and it will be reported late with the credit reporting agency. The last 12-24 months history weighs most prominently on your score.

Credit Utilization – is how you use your credit. If you have credit cards, what kind of balance do you have in relation to the amount available. If you are over 50% of available balance, it is considered high. Have you added new credit recently? That may also play a roll in your credit score.

Credit History – is how long you have had your credit. The longer you have had credit, the better to determine how you handle life’s ups and downs.

Types of Credit in Use – Do you have a mortgage loan, a car loan, credit cards, or finance companies listed on your credit report? Too many credit cards or use of finance companies (example of a finance company loan is if you take store financing for furniture) can negatively impact your credit.

Inquiries – How many times have you had your credit pulled. It can show that you are applying for credit in many places and may have loans or credit cards that are not yet showing up on your credit report. If you have your credit pulled a number of times within a short period (14-30 days) of time when shopping for a mortgage or car, the credit reporting agencies will only count it as one inquiry.