Where Your Credit Score Comes From

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It has been said credit is the 8th wonder of the world.   In many ways this is accurate.  For example, why would someones credit score drop when they close a card off?  On the surface, this makes little sense.  However, dig deeper and logic is behind why credit does what it does.

5 Major Components of Your Credit Score

When broken down into it’s basic components credit makes quite a bit of sense.  Understanding the dynamics behind how credit scores are generated helps Arizonans maximize their credit scores.

1. Payment History | 35% of your credit score

The obvious component in this category is a consumer’s payment history with different creditors.  This includes how many on time payments were made, how many late payments were made and what type of late payments were made (30, 60 or 90+ day late).  In addition, this category factors in collection accounts and judgments.

2. Amounts Owed | 30% of a persons credit score

The amounts owed category involves a few different elements.  First, this portion of your score looks at the amounts owed on all types of accounts in total.  In addition, the separate amounts owed on different types of accounts impacts your credit score.   Lastly, the amount or proportion used for revolving accounts plays a large role in how high your credit score is.

3. Length of Credit History |15% of a persons credit score

The length of time or age of a consumers credit is significant.   The longer or older their credit the more positive an impact this section has on the over all credit score.

4. New Credit & Inquiries | 10% of a persons credit score

What types of credit  accounts one has, how many of each different type of account are on the credit report, and how many recent inquiries are present have determine this section of a credit score.

5. Types of Credit | 10% of a persons credit score

This section of a credit score is measured by how many new accounts someone has and how long it has been since they opened a new account.

As you can see, a credit score actually does come from somewhere and there is a method behind the FICO madness. While several credit agencies exist, the three most common and most accepted are:

Evaluating a client’s credit is a role a loan officer should assume.  After all, credit heavily impacts your home loan experience.  In fact, lenders review much more than just your credit score.  For example, mortgage lenders review the following non-score factors:

  • Late payments/payment performance (late means more than 30 days late)
  • Bankruptcies
  • Judgments
  • Liens
  • Short Sales
  • Foreclosures
  • Loan Modifications
  • Collection Accounts
  • Accounts showing that an applicant has filed a dispute relative to a trade line
  • The length of time an applicant has had and established credit
  • The number of trade lines an applicant has
  • The amount of monthly debt an applicant has

By Jeremy House



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