Your credit scores usually determine the price you pay for your money (your mortgages, your auto loans
and leases, your credit cards, business loans, etc.). 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. If you have had any bankruptcies within the last 7
years, it will seriously affect your ability to borrow or establish new credit accounts. 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. 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. 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. 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
- 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. For instance, if you owe $10,000, and you have
$100,000 of credit available to you, you are only using 10% of your available credit line. On the other
hand, if you owe $10,000 and you only have $10,000 available to you, you have "maxed out" your
available credit and your credit scores will be very negatively impacted. Therefore, it is not how much
you owe, but how much you owe compared to what you are able to borrow. Here are three practical
steps to improve your credit score in this area:
Don't close your credit accounts unless it is necessary to do so. It is better to have many open
accounts with little or no balance than to have just one or two accounts regardless of the balance.
Don't concentrate large balances on just a few accounts. Pay outstanding debt down as close to zero
as possible, and evenly distribute the remaining balance across all your open credit lines. The key is
to keep the balances down below 30% or at the very least 50% of your available credit line(s).
Call your credit card companies and try to increase your credit limits if they can do so without pulling a
new credit report.
YOUR CREDIT HISTORY (HOW LONG YOUR ACCOUNTS HAVE BEEN
OPENED): 15% IMPACT ON YOUR SCORE
The longer your accounts have been opened, the higher your score will be; newly opened accounts will
bring your score down. Here are three practical steps for you to improve your score in this area:
Don't close your credit accounts. If you must, close the newest ones instead of the oldest ones. Your
score will improve over time if you keep accounts open and use them every once in a while. Think twice
before jumping on that latest 0% credit card offer or opening a new card just to get a 10% discount at a
department store.If you don't have much of a credit history, and you are planning on taking out a
mortgage in the future, it may be a good idea to establish a few open credit lines with little or no balance
on them. Although newly opened accounts tend to lower your score initially, they will improve your
score once they've been open for awhile, somewhat active and paid off with little or no balance.
TYPE OF CREDIT THAT YOU HAVE OPEN: 10% IMPACT ON YOUR
A good mixture of auto loans and leases, credit cards and mortgages is always best.
Too many credit cards is not a good thing, and having a mortgage does increase your score.
Practical steps to improve your score in this area include: (1) Having 3-5 revolving credit cards open is
optimal.; and, (2) Having a good mix of auto loans, credit cards and mortgages is better than having
only credit cards.
NUMBER OF RECENT INQUIRIES MADE BY CREDITORS:
10% IMPACT ON YOUR SCORE
Inquiries affect the score for one year from the time they're made. Your score isn't impacted when you
check your own report. It's only affected if a potential creditor checks your credit. These include
department stores, as well as credit card, auto finance and mortgage companies. Here are three steps
you can take to improve your score in this area: (1) Multiple auto and mortgage inquiries are treated as
only one inquiry if made within 45 days of each other. So, it's better to shop for a car or a mortgage
over a two week time-frame, rather than to prolong it over a longer timeframe. (2) Don't apply for a lot of
credit or open multiple credit cards at the same time; and, (3) If you're thinking of applying for a
mortgage within the next 90 days, it would be good to wait until after your loan closes before you apply
for any new credit.
Source: CMPS Institute
By: Tony JaoRegional Manager-Residential Mortgage
267 Fifth Ave,
New York, New York 10016
Corporate NMLS: 411729