The Five Factors of the Credit Scoring Model

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The Five Factors of the Credit Scoring Model
The following will analyze the five factors of what comprise your credit score. The five factors are as follows: 1. Payment History-35% of total credit score, 2. Outstanding Credit Balances-30% of total credit score, 3. Length of Credit History-15%, 4. Inquiries-10%, and 5. Type of Credit 10%.

For more information on your credit report and how it pertains to mortgage financing, contact Dave Zwierecki at 888-418-4467 or [e-mail].

Your Outstanding Credit Balances is an often misunderstood factor in credit scoring. Many people think that if they have a higher limit available on their credit cards that this will automatically be better for them than a lower limit. Many other consumers think that by having numerous credit cards this will be better for their credit scores too. The key here with managing your credit balances is to make sure that you never borrow over 50% of your maximum credit limit. Ideally, you would like to keep your balances below 30% of your credit limits. For example, if you have a credit card with a $1,000 maximum credit limit, then ideally you would not want to carry a balance over $300 and you definitely do not want to carry a balance of $500, which is 50% of your credit limit. Anytime you go over this 50% threshold, this can negatively affect your credit score. Anytime you are maxed out on your credit limit, this is very bad for your credit score and if you ever go over your credit limit, this is seriously bad for your credit score. Therefore, just because you have the available credit does not mean that you should spend it. You should focus on keeping your balances at reasonable levels to maximize your credit score.

Derogatory accounts such as collections accounts or judgements will also greatly affect your credit score. One collection account can drop your score as much as 50 points or more once it reports.

Another Factor that is used in the credit scoring model are the lengths of your credit accounts. The longer-aged accounts tell your financial story to creditors. Be sure not to close unused accounts, because they may reduce the amount of credit you have available, thus increasing your credit utilization.

The five factors are used by FICO to derive a credit score. The lenders use the credit score to help determine your interest rate and loan amount.

Your Payment History is the easiest factor to explain: pay your bills on time and in full. Late payments, judgements, collection accounts, and bankruptcy filings will all have a negative impact on your score.

Borrowers with FICO credit scores of 800 or more typically utilize very little of their available balances (the average is 7%).

The type of credit you have has a 10% impact on your credit. A mix of revolving debt and installment loans is optimal, rather than just credit cards. Credit Agencies tend to frown on consumer finance company tradelines and getting credit at a store that is not a department store.

 

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 Information listed above is to be used for educational purposes only and is not guaranteed

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