On our latest episode of the Community Partner Education Series, we set down with Alexandra Erlich of Riverstone Law to uncover some of the questions surrounding credit scores. Especially in the mortgage world, credit scores are critical to your ability to borrow money. We wanted to know exactly what factors go into a credit score. The following factors are what the computer algorithms take into account when calculating your credit score.
- Payment History: Payment history is the most important aspect of your credit score, making up 35% of the entire score. This is the way you are able to prove your creditworthiness to lenders as your past long-term payment behavior is used to predict your future long-term behavior. This includes any type of account, revolving or installment, though certain ones are weighted differently.
- Credit Utilization: This is the overall ratio of current balances compares to your overall limit. When a high percentage of your credit limit has been used, this indicates to lenders that you might be overextended. Ideally, you want to be under the 30% mark. For example, if you have a $1000 limit, you want to keep a balance of under $300 at any given time. The easiest way to actually impact or improve your credit is to pay off or pay down those higher balances because credit utilization is 30% of your entire score.
- Length of Credit History: The length of your credit history accounts for 15% of your entire credit score. This, of course, is something hard to impact, because only time will improve your standing. It’s important to let our accounts age and to maintain that long history of spending and making payments. It helps to keep accounts active by making consistent purchases — even small purchases like a cup of coffee every month will help you meet this goal. You also don’t want to close an account just because you don’t use it. It may be beneficial to your credit to keep it open and just make small purchases.
- Credit Mix: There are 4 different types of credit accounts that go into your credit score: mortgage, revolving credit, installment loans, and other. It’s important to have a good mix of each type of credit to demonstrate to lenders you can handle multiple types of accounts. We will dive into each of these types of accounts in next week’s blog.
- New Credit: Taking on too much credit can damage your score and indicate you may be in trouble. However, adding new credit to a troubled account can sometimes help your score. You never want to open a new account when you’re shopping for a mortgage or an auto loan etc. A new account can throw everything out of balance. Once 6 payments have been made, the account is no longer listed as new. Once those 6 payments are posted, the score will begin to balance out.
When factoring your credit scores, the computer algorithms take into account these 5 factors. Payment history is of utmost importance, followed by credit utilization and length of credit history, and then credit mix and new credit. These are all important to think about when looking at your overall credit picture. Next week, we will be discussing the different types of credit accounts that are used in calculating your score. If you have any questions regarding your credit, reach out to Alexandra Erlich at Riverstone Law or Cheri Landin at The Mortgage Co and we’d be happy to help you!
Through all of my years in the banking and finance sectors I have found that there is one arena where skilled, knowledgeable and service minded professionals were few and far between: Credit Consultation and Restoration. After personally going through credit highs and lows over the years and working with countless companies I finally found the one that actually delivered on every commitment. Riverstone Law with the wealth of expertise and service impressed me to such a level that I sought employment with the company. I am so grateful to finally be in a position with a company that I believe in wholeheartedly and offering a service that I know without a shadow of a doubt everyone can benefit from. Every day excites me as I share my knowledge of the FICO and credit systems with all of the colleagues, professionals and their networks I have had the pleasure of working with for numerous years, now as I watch their pipelines, businesses, and incomes grow I am confident I have found my calling.