Five Factors Of Credit Scoring

The Five Factors of Credit Scoring

Credit scores are comprised of five factors. Points are awarded for each component, and a high score is most favorable. The factors are listed below in order of importance.

1. PAYMENT HISTORY – 35% IMPACT
Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments and charge-offs all have a negative impact. Missing a high payment will have a more severe impact than missing a low payment, and delinquencies that have occurred in the last two years carry more weight than older items.

DON’T PAY OFF COLLECTIONS OR CHARGE-OFFS – Once your loan application has been submitted, don’t pay off collections unless the lender specifically asks you to in order to secure the loan. Generally, paying off old collections causes a drop in the credit score. The lender is only looking at the last two years of activity.

DON’T CLOSE CREDIT CARD ACCOUNTS – If you close a credit card account, it can affect your ratio of debt to available credit which has a 30% impact on your credit score. If you really want to close an account, do it after you close your mortgage loan.

DON’T MAX OUT OR OVER CHARGE EXISTING CREDIT CARDS – Running up your credit cards is the fastest way to bring your score down, and it could drop up to 100 points overnight. Once you are engaged in the loan process, try to keep your credit cards below 30% of the available credit limit.

DON’T CONSOLIDATE DEBT TO ONE OR TWO CARDS– Once again, we don’t want you to change your ratio of debt to available credit. Likewise, you want to keep beneficial credit history on the books.

DON’T RAISE RED FLAGS TO THE UNDERWRITER-Don’t co-sign on another person’s loan, or change your name and address. The less activity that occurs while your loan is in process, the better it is for you.

DO JOIN A CREDIT WATCH PROGRAM – Your bank, credit union or credit card company may be able to provide you with a free credit watch program that can alert you to any changes in your credit report. This can be a safeguard to help you intervene before the underwriter sees a problem.

DO STAY CURRENT ON EXISTING ACCOUNTS-Late payments on your existing mortgage, car payment, or anything else that can be reported to a CRA can cost you dearly. One 30-day late payment can cost anywhere from 30 to 75 points on your credit score.

DO CONTINUE TO USE YOUR CREDIT AS YOU NORMALLY WOULD – Red flags are easily raised within the scoring system.

Ultimately, experts say that it is best to have two to five credit cards, and no more than that. You should keep your balances as low as possible. If you have a credit account with a zero balance, do not close the account. Instead, make a small purchase so the card shows up as an active account on your credit report, and you will be awarded points for your long-term credit history. These are just a few tips to consider as you seek to obtain mortgage financing. But you should always know that as your loan originator, my job is just beginning when you close your loan with me. As soon as you begin to make mortgage payments on time and in full, your credit standing will begin to improve. My team and I will continue to monitor rates on your behalf and alert you to the opportunity to refinance into a loan program with a lower interest rate as soon as possible. Our long-term goal is to help you build a strong financial future.

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