Understanding Credit Scores

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Understanding Credit Scores

1. What Makes Your Score?

  • 35% = Based on payment history (i.e. on-time or delinquent)
  • More weight on current pay history
  • 30% = Capacity (capacity is king)
  • 15% Length of credit
  • 10% Accumulation of debt in the past 12-18 months
  • Number of inquiries and opening dates
  • 10% Mix of credit
  • Installment (can raise) vs. revolving (can lower)
  • Finance company loans can lower your score

2. Range of Scores:

  • 850 - 730 = A+
  • 729 - 680 = A
  • 679 - 640 = B
  • 639 - 600 = C
  • 599 - 550 = D
  • 549 and Below = E

3. What Actions Hurt Your Score?

  • Missing payments (regardless of amount, it can take 24 months to restore credit with one late payment)
  • Credit cards at capacity (i.e. maxing out credit cards)
  • Shopping for credit excessively
  • Opening numerous credit accounts in a short timeframe
  • Having more revolving debts in relation to installment debts
  • Closing credit cards (this could lower available capacity)
  • Borrowing from finance companies

4. What Can Improve Your Score?

  • Pay off or pay down credit cards
  • Do not close cards because capacity may decrease
  • Move revolving debt to installment debt
  • Make payments on time (older late pays become less significant)
  • Slow down opening of new accounts
  • Acquire a solid credit history with years of experience

5. Approximate Credit Weight for Each Year:

  • 40% = current to 12 months
  • 30% = 12 - 24 months
  • 20% = 25 - 36 months
  • 10% = 37+ months