How credit scores
are determined - CREDIT SCORES ARE MATHEMATICAL FORMULAS CREATED
TO PREDICT THE PROBABILITY OF LATE PAYMENTS IN THE FUTURE!
HOW DO THEY COME UP WITH THE FORMULAS?
35% of the score is based on PAYMENT HISTORY
How recent- this the most important
How late the payment is. Negative weight is given (in this order:
30, 60 and 90 day lates)
30% of the score is based on BALANCES OF CREDIT
These are heavily weighted on revolving cards
If you have more than 50% of your limit, there is a hit
If you have more than 75% of your limit, there is a harder hit.
You earn more with smaller balances than with a zero balance
15% is based on your CREDIT HISTORY
The older the trade line, the positive weight
Ideally, they are looking for 3 – 5 trade lines
Ideally, 30 years is the perfect length of time to have a credit card
They divide the number of cards by the length of time
(Every time you open a card, it drops your score)
10% is based on the TYPE OF CREDIT
They are counting the number of trade lines in each category
A mix is best
They are keeping track of all accounts: open, closed & frequency
Installments through finance companies can hurt your credit
(This is something you have in common with late payers)
10% is based on the NUMBER OF INQUIRIES
There are parameters: it only goes back 12 months
Negative weight is given to: what kind, how often
The weaker your credit ability, the more negative impact per pull
Pulls of the same category count as one for 30 days.
Please note that this information is presented as a general basis
for the determination of credit scores, and should not be considered
an exact formula.
There are a number of companies that offer help with removing certain
negative items from you credit report. This can cause you scores
to increase dramatically. You may want to consult a credit repair
company if your credit is less than desireable and you can not qualify
for a mortgage.
Many people are surprised by a credit score that is lower than
expected. "I pay my bills on time every month. So why is my score
still low?" The are many reasons why this could happen but one of
the more common reasons is credit card balance versus available
limit. Credit cards that are reaching their available limit or have
exceeded the limit will lower your credit score over time even if
the consumer makes timely payments. Managing the balances of your
credit cards can have a dramatic effect on your credit score.
Since the introduction of Automated Underwriting, a computerized
loan risk assessment process, loan applicants' credit scores have
become the most weighted factor in underwriting a loan.
Tips for raising your score:
Keep balances low on credit cards and other "revolving credit."
Pay off debt, rather than move it around.
Don't close unused credit cards as a short term strategy to raise
credit scores. Owing the same amount but having fewer open accounts
may lower your score.
Don't open a number of new credit accounts that you don't need,
just to increase your available credit.
