In part 1 of our All About Credit Scores series, we covered a few simple ways to tip the scales in your favor when trying to maintain a good/great credit score. Today we are going to cover the “secrets” behind credit score calculations.
Until recently, the secrets of credit score calculation have been very closely guarded — but we can now pretty closely estimate how your score is put together.
Payment History = 35%
Do you pay your credit on time?
Length of positive credit history
Severity and quantity of delinquencies
Amount Owed = 30%
Quantity of credit accounts — too many credit cards with balances can lower a score.
Length of Credit History = 15%
The longer the history, the better.
How long have your credit accounts been established?
How long has it been since you used certain accounts?
New Credit = 10%
Research shows that opening several credit accounts in a short period of time does not represent greater risk — especially for people who do not have a long established credit history.
Types of Credit In Use = 10%
2 installment loans
3 revolving accounts with balances
Balances on revolving debt below 30% of the high credit
No collection accounts
No public records
No foreclosures
No late payments
While the most important thing in credit scores is your overall score — what makes up that score is helpful to know. For example, if you know that too many credit cards with balances can hurt your score — you may want to take steps to consolidate those cards into one account or pay them off if possible.
Many times, your mortgage professional will have access to something called a “what-if” simulator — which will allow them to easily explore how different actions may impact your credit score. The simulator will allow you to experiment with actions — individually or simultaneously — from making payments to closing accounts, transferring balances and more. It is helpful to predict results and to make informed decisions about what actions on your part could easily increase your credit score.
So if you haven’t heard of the “what-if” simulator and are working on refinancing or buying a home, make sure you bring it up with your loan officer — a boost in credit score could save you thousands of dollars in interest over the life of your loan!
More From Arizona Mortgage Team
- All About Credit Scores (Part 1 of 3)
- All About Credit Scores (Part 3 of 3)
- The FHA Streamline Refinance: Do You Need A 620 Credit Score?
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