December 3rd, 2019 9:59 AM by Jackie A. Graves, President
Consumers are encouraged to check their credit reports once per
year. The primary reason for doing so is to make sure there aren't any
mistakes. Unfortunately, credit reports are prone to contain mistakes. It's not
really the fault of the three main credit repositories, Equifax, Experian and
TransUnion because all three are just a database. Whatever is reported to them
is what you see. Further, someone with a similar name can show up on someone
else's report. If you're not the only Bob Smith in town, this is certainly
Someone else's poor credit might very well be showing up on your
report which can directly damage your credit scores. When you find an error
work with your loan officer to get it fixed. Your loan officer has working
relationships with credit agencies and can help get mistakes fixed and provide
a method to get your scores back to where they should be.
But have you ever wondered how these scores are calculated in
the first place? They follow an algorithm first developed by The FICO Company
years ago. For a while, credit scores weren't the primary force behind a credit
decision but over time the impact of a credit score became more and more
important. Most every loan program available today has a minimum credit score
and if a score falls below the minimum, there's some additional work that needs
to be done to get those scores back on track.
There are five characteristics of your credit history that make
up your three-digit score: your payment history, account balances, how
long you've had credit, the types of credit used and how often you've applied
for new credit over the past couple of years.
Credit scores range from 300 to 850. Let's say a borrower has a
credit score of 600 but needs a 620 to qualify for a particular loan program.
Credit scores will improve much more quickly by paying attention to the two
categories that have the greatest immediate impact on a score- payment history
and account balances.
Payment history accounts for 35 percent of the total score and
account balances 30 percent. When someone makes a payment more than 30 days
past the due date, scores will fall. An occasional "late pay" won't
really do much damage to a score but continued payments made more than 30, 60
or 90 days past the due date definitely will. By stopping the late payments scores
will begin to recover.
Account balances compares outstanding loan balances with credit
lines. If a credit card has a $10,000 credit line and there is a $3,300
balance, scores will actually improve. The ideal balance-to-limit is about
one-third of the credit line. As the balance grows and approaches the limit,
scores will begin to fall and fall even more should the account balance exceed
the limit. This category contributes 30 percent to the total score.
The remaining three have relatively little impact. How long
someone has used credit accounts for 15 percent of the score but there's really
nothing anyone can do to improve this area other than to wait. Types of credit
and credit inquiries both make up 10 percent of the score. By concentrating on
payment history and account balances, scores will improve significantly over
the next few months.
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