Credit plays a critical part in almost all of our activities in this economy. Understanding what your credit score is and how it works can be a challenge. A great way to understand the role your credit score plays in your life begins with a basic knowledge of what a credit score is and how you can lower it or increase it.


What Makes Up a Credit Score?

Credit scores are based on several major, different models. Their names are EMPIRICA, FICO, and BEACON. These scores, are calculated from different data in your consumer credit report. Each scoring model weights the data differently. The information in your credit report can be grouped into five categories; Payment History, Amounts Owed, length of Credit history, New Credit and Types of Credit. The two most important measures are payment History and Amounts Owed. They are usually over 70% of your credit score weighting with the remaining three measures being about equally weighted in the remaining 30% of the weighting system.

Basically, each scoring model looks for and assigns weights to these different measures of payment history and financial performance. The goal is to predict, based on the past performance of literally millions of other people, what levels of debt and credit are associated with paying ones bills and loan payments on time. This is really a very simple concept that has nothing to do with value judgments and everything to do with statistics. Having said that, there are things you can do that will lower your credit score on any model and things that will raise it. We have listed a few of the more obvious ones below:

What Actions Will Hurt My Score?

Missing or late payments (big or little one late payment can take up to 24 months to roll off of your credit history)
Credit cards at capacity (i.e. maxing out credit cards)
Opening up numerous new credit lines or revolving accounts in a short time period.
Too many credit inquiries (NEVER give a car dealer or someone else who want to finance a purchase your social security number. They WILL run your credit)
Closing credit cards out (this lowers available capacity to borrow)
Having more revolving loans (credit cards) in relation to installment loans
Borrowing from finance companies. (usually an indication that you can’t get other credit)
Using a “consumer credit agency” to renegotiate your payment terms. (many lenders treat this as a bankruptcy)

Ways To Improve Your Score.">/b">

By understanding what lenders view as good credit management, you can build a strong credit history, improve your score and qualify for better loan terms.

Make payments on time
Pay down on credit cards
Stop opening new charge or trade accounts
Build a solid credit history with years of experience
Move revolving debt into installment debt. The installment debt is not all "due" and so your free cash flow is increased.

What Doesn’t Affect The Score (but does affect your loan)?

Your credit score is a number based on the information in your credit report, so the following factors will not affect your credit score. That doesn’t mean that they are unimportant though because they DO affect the mortgage loan approval process:

Debt to income ratio
Income
Length of residence
Length of employment

Finally

You may have more than one credit score and scores change over time. The credit score from each consumer reporting agency considers only the data in your report at that agency. If your current scores from the three credit reporting agencies are different, it’s probably because the information those agencies have in your file differs and because they use different models that emphasize different aspects of payment performance. As your data changes at the credit reporting agency, so will your score. Your credit score from a month ago will probably not be the same score you get from the credit reporting agency today.

As always, if you have questions, feel free to call us!