December 4th, 2018 8:26 AM by Jackie A. Graves, President
scores are calculated using an algorithm originally developed by The FICO
Company. This algorithm considers five different characteristics of a credit
file. Of course, payment history carries the most weight, contributing 35% to
the total, three-digit score. The second most important relates to current
account balances and credit limits. Scores need consumers to use credit before
scores can be properly calculated so having a balance is important. 30% is
attributed to this category and the ideal balance appears to be around
one-third of credit lines. Keeping balances around this one-third target causes
scores to improve.
someone has used credit is also a factor, making up 15% of the score and the
final two of the five both contribute 10%. Types of credit used and credit
inquiries. Types of credit boosts scores when consumers responsibly use
different types of credit and credit inquiries logs in the number of times
someone has requested credit. But about that 10% for a credit inquiry, if it
makes up such a small part of the total score, why do lenders care about this
requests for credit over the past year or so won’t hurt scores but making
several requests for different credit accounts in a relatively short period of
time can indicate the consumer is going through some sort of financial
difficulty, perhaps being laid off or otherwise a loss of regular income. Such
requests for credit can cause scores to drop, but still, it’s just 10% of the
Each time a
consumer makes a request for credit, that request is recorded in the credit
file. Again, an occasional request is fine. What can cause a loan application
to stop dead in its tracks is to see a recent credit inquiry on a credit report
but no indication any account has been opened. It usually takes about 30 days.
That can mean someone opened up a credit account or maybe bought a car and financed
it but the amount borrowed and the terms haven’t yet made it to the credit
bureaus. When a lender looks at a credit report with recent inquiries, there is
no way the lender can properly determine a consumer’s new monthly payments.
Someone with relatively high debt ratios could take out a new car loan which
could push ratios so high they can no longer qualify.
happens, the lender will request the borrower to explain the inquiry and verify
that no account was opened and if an account was opened, to send in
documentation regarding the terms of the new account. That’s why loan officers
tell you that once you apply for a mortgage, just sit tight with any other
credit requests until and after your loan is ultimately funded and closed.
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