The 5 categories on which Credit Score is Calculated.

By
Mortgage and Lending with Amerisave Mortgage Corporation

A person's credit score has been the most sought after prize in personal finance history.  It still remains elusive for some because of the myths, misrepresentations and mysteries that surround credit scoring.

Credit scores range from the 300's to the mid 800's.  One is scored upon 5 different categories - Payment history, how long your credit lines have been open, percentage of available credit being used, type of credit and inquiries.

Payment History has the biggest impact.  Late payments on any of your credit lines are reflected here.  If you don't have any late payments than you are one step closer to better credit.  If you are unable to make full payments each month, then it is far better to make the minimum monthly payment on a credit card than risk a late payment.  (According to the credit bureaus a late payment is one that is more than 30 days past due.  If you haven't paid by your payment due date, send in the payment anyway rather than waiting for the next month.)

Percentage of available credit or outstanding credit balances.  The credit bureaus don't look at how much credit you have available, they look at the percentage of what you are using.  Are you a good steward of your own debt.  Carrying a smaller percentage of debt over several different cards is much better than have one card maxed out and the others showing no balance.  Keep your balances less than 30% of the available limit on your cards nets you a better score than having balances of 50% or higher.  Maxing out your cards is detrimental to your score where as going over your limit is extremely hurtful.

Credit history or length of time your credit lines have been open is another category.  The longer time period you have a line open the better.  Having freshly opened credit lines can needlessly hurt your score.  I.e. - just because you are being offered 10% off your purchase to open a card, think if you are planning on buying or refinancing within a year.  Will 10% off a $500 purchase be better than having your credit score lower and having to pay a higher interest rate over the next 30 years?

Type of credit.  The ideal credit holder has a mortgage, a car note and 2 or 3 different credit cards.  Any one of these will not hurt your score.  This is just the ideal.  Don't run out and buy a card thinking it will increase your credit score (see credit history above)

Lastly, Inquiries.  The number of times that folk pull your credit can have an adverse impact on your credit.  The credit bureaus understand that you may be shopping for a car or the best possible loan.  They don't understand why someone has to have their credit pulled more than a certain number of times in a particular time period. 

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Rainmaker
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Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Authentic Feng Shui Expert
Matthew, I am fortunate enough to have learned the hard way many years ago how important it is to have an excellent credit score.  Thankfully I learn most lessons well!  Thanks for the advice.
September 04, 2007 08:38 AM #1
Rainmaker
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Randall Schrader
Competitive Insurance of Dundee - Dundee, FL

It's easy to remove the credit inquiries in a situation where you are shopping for a car or mortgage.  A simple LOX (letter of explaination) to the credit bureaus should suffice.  In my opinion, this doesn't effect the score much anyway, as the bureaus realize that this is largly out of your control and factor this into their scoring models.

June 11, 2008 09:02 AM #2
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Rainer
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Matthew Rosov

Certified Mortgage Planning Specialist
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