The Five Factors of Credit Scoring

There are five factors that comprise the credit score. These are listed below in order of importance, just as an underwriter will look at the score:

• Payment History: 35% impact. Paying debt on time and in full has a positive impact. Late payments, judgments and charge-offs have a negative impact. Missing a high payment has a more severe impact than missing a low payment. Delinquencies that have occurred in the last two years carry more weight than older items.
• Outstanding Credit Balances: 30% impact. The ratio marking the difference between the outstanding balance and the available credit is important here. Ideally, the client should keep their balances below 10% of available credit limits.
• Credit History: 15% impact. This marks the length of time since a particular credit line was established. A seasoned borrower is stronger in this area.
• Type of Credit: 10% impact. A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards only.
• Inquiries: 10% impact. This quantifies the number of inquiries that have been made on a consumer’s credit history within a six-month period. Each hard inquiry can cost from 2 to 50 points on a credit score, but the maximum number of inquiries that will reduce the score is 10. In other words, 11 or more inquiries in a six-month period will have no further impact on the borrower’s credit score.

Remember, a computer that’s not taking any personal factors into consideration calculates these scores. When a credit report is generated, it is simply today’s snapshot of the borrower’s credit profile. This can fluctuate dramatically within the course of a week, depending on the individual’s own activities. Therefore, while you are in the process of obtaining a new mortgage, it is not in your best interest to go on a shopping spree or to have numerous inquiries from mortgage companies. Large credit purchases or allowing mortgage companies to generate your credit report can have a detrimental affect on your credit score. You need to make sure that you are not creating a negative impact on the score while the lender is reviewing your file.

Secondly, it is often beneficial to compile a Tri-Merge Credit Report. This combines the scores provided by Fair-Isaac (FICO) with the score generated by TransUnion (Empirica) and Equifax (Beacon). The lender should be provided with this rounded profile because these three scoring systems can vary in their results. The lender is going to look at the middle score and throw out the other two. In many cases, this works to your advantage.