Perhaps the most significant part of your credit report is your credit score. Credit scores range from 350 to 850, with 850 being the best possible credit score that you could receive, and 350 being the worst possible credit score. There are five factors that determine your credit score:
Your Payment History - 35% impact on your credit score. Paying debt on time and in full has a positive impact. Late payments, judgments, charge-offs, collection accounts and bankruptcies have a negative impact. One of the most important issues as far as payment history is whether or not you have had any late mortgage payments in the last 12 months. Timely mortgage payments are weighted heavily by the scoring systems and are one of the most vital requirements that lenders look for when evaluating your credit history. Many times a single late mortgage payment within the last 12 months can hold up your file or spell the difference between the best interest rate and the next credit level. This is not to say that your mortgage is the only debt you should pay on time. Your payment history on other debts (car payments, credit cards, etc.) is also given a lot of weight.
The credit scoring systems evaluate how many late payments you have had and whether they were 30, 60 or 90 days late, or whether they are currently in default, with default being the worst situation. Additionally the systems look at whether the late payments were consecutive. If you only have one or two minor late payments on your report with no other derogatory marks, your score will not be terribly affected, but you will have a tough time getting over the critical 700 level.
Bankruptcies and judgments are another major area of importance. If you have had any bankruptcies within the last 7 years, it will seriously affect your ability to borrow or establish new credit accounts. Additionally, if you have had any judgments within the last several years, it is very important that you pay off the judgment and get a "satisfaction of judgment" from the court. Any unsatisfied or recent judgments will make a bad dent in your credit scores and adversely affect your ability to borrow. Usually, judgments and liens must be paid prior to the closing. However, in some cases, they can be paid out of the loan proceeds.
Here are four practical steps that you can implement to improve your credit score in the area of "Payments":
- Make all your payments on time.
- Past dues on any account will destroy your score - bring your delinquent accounts current immediately. A 30 day late payment one month ago is worse than a 90 day late payment three years ago.
- Pay your bills before they go to a collection agency.
- Check your credit report for accuracy on a regular basis; and make sure that disputed bills are not negatively affecting your credit scores.
The Balance You Owe vs. Your Available Credit Lines - 30% impact on your credit score. Keeping your credit balances below 50% of your available limit is very important. Keeping your balances below 30% of your available credit is even better. This is perhaps the single most misunderstood part of credit scoring. There are a lot of misinformed people that don't understand how the credit scoring systems work, and yet they insist on pretending to be experts in this area. Here are just a few of the common myths:
- You should close all your credit accounts if you are not using them.
- You should not have credit accounts appear on your report after they have been closed.
- You should not have any open credit card accounts at all.
- You should not have high limits on your credit lines.
First of all, the credit scoring system looks at the percentage of debt that you owe compared to your overall credit lines - not the amount of credit that you have available to you. For this reason, most of the time it is better to leave your credit accounts open. By not using the credit that is available to you, the system regards you as having enough financial restraint and discipline not to overload on debt.
