Paul Ferraresi

What factors affect your credit score?

There are five factors which are used in credit scoring calculations that determine your overall credit score.

Previous Credit Performance (Payment History) 35%

A lender wants to know what your payment history is like. Have you paid everything on time, are you late on anything now, and so on. Your payment history is just one piece of information used in calculating your score, although it can be the very important.

Payment history on your accounts.

These include credit cards, retail accounts (department store credit cards), installment loans, finance company accounts and mortgage loans.

Collection items and Public records.

This includes judgments, bankruptcies, suits, liens, collection items and wage attachments. Most of these are considered quite serious, although older items count less than recent ones.

It’s all in the details.

This includes specific details on late and missed payments. Negative information/late pays are determined using three factors.

1. Recency – How long ago was the last delinquency? How old is the late pay? A 30-day late payment made just a month ago will affect your score much more than a 90-day late payment from five years ago.
2. Severity – What level of delinquency was reached? How late was the payment made? 30 days, 60 days, 90 days or worst of all, is the payment still outstanding.
3. Prevalence – How many credit obligations have been delinquent? The amount of negative items as compared to your total amount of available credit. For instance, 5 accounts showing 3 late payments is much worse than 10 accounts showing 4 late payments. One of the biggest sub factors is how many accounts show no late payments. A good track record on most of your credit accounts will increase your over all FICO score substantially.

Current Level of Indebtedness (Amount Owed) 30%

How much is too much? Can the borrower pay me and still afford to pay his other bills? Not necessarily. Having available credit can actually help your ratio of debt to available credit. These are the types of questions that most borrowers want to know and the answers are almost as important as your previous credit history.

Total amount owed on all open accounts. Paying off your credit cards in full every month, does not mean that they won’t show a balance on your report. Your total balance on your last statement is generally the amount that will show in your credit report.

Specific types of accounts, such as credit cards and installment loans are scored differently and in conjunction with the overall amount owed on all open accounts. This also factors into your balance on each specific type of account. For instance; you have a credit card with a very small balance and no late pays. Even though the balance is low, this still looks very good as it shows that you are able to manage your credit responsibly.

How many accounts do you have open and how many have balances? A large number of open accounts, even with small balances, can indicate higher risk of over-extension. This is weighted in your FICO score but most lenders leave it to their discretion as they have access to your income amount. For the most part though, it is good not to have too many credit card accounts, three maximum.

How much of the total credit that is available to you are you using? In other words, are you close to maxing out? For example, if you have a credit card with an available credit line of $1000 dollars and you have a current balance of $850.00 or more, then you are nearly “maxed out.” Several credit cards or other debts with balances approaching the credit limit will affect your score negatively, even if you have made your payments responsibly. Your FICO score will factor your overall ratio of debt to your overall limits.

Look forward to part 5 of our “Managing Your Credit Score” series next week!