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A Summary of Credit


Your FICO score predicts the likelihood of you having a 90-day late over the next 2 months.

These 3 industries have different credit scoring mechanisms and often report different credit scores for the same person.

  • Mortgage
  • Consumer Credit
  • Auto

There are 3 different and independent credit bureaus. They do not share information and consequently will often report different score for the same person. They are;

TransUnion 336 - 843
Equifax 300 - 850
Experian 300 - 850

Thus, if a person pulls their own credit from the Internet, that person might have a different credit score than if a loan officer in the mortgage industry pulled their credit.

There are usually 4 "factor codes" listed under each score. These are the main items that a person should work on to improve their credit score. These factor codes are each credit bureaus main reasons for not giving the person a perfect score. There are 40 possible factor codes altogether.

No score will be reported if there has been no reported activity in any open account in the last 6 months.

 

The Individual Weightings for Your Credit Score


35% - Past Payment History

a) Recency - Lates within the last 6 months really hurt

  • If you can get rid of some recent lates, it can really help your score.
  • If a 30-day late goes from 6 months old to 7 months old, your score will go up.

b) Frequency

c) Severity - Proportionate number of 60 and 90-day lates

 

30% - Credit Balances

  • Ideal credit utilization is about 20%
  • It is best if each credit facility ahs equal credit utilization.
  • It is bad when more than 50% of the available credit is used.
  • It is terrible when more than 75% of revolving debt
  • High balances on revolving debt is bad.
  • If a person closes down an empty credit card, the total utilization of available credit goes up. This lowers score.
  • Often opening up a new credit card will raise score. With the new credit card opened, the total percentage of credit utilization has gone down.
  • Try to spread your balances evenly over all of your cards
  • Small balances on credit cards give more points than 0 balances.
  • You only need to show a small balance on a card at the time of the credit pull. A credit pull is a snapshot of what is on the card at the time of the credit pull. Always trying to keep the balance on your credit cards small doesn't help your score. The balances on your credit cards are only important at the moment of credit pull.
  • A home equity line of credit of $35,000 is viewed by the scoring algorith as an installment loan doesn't usually hurt the score. Smaller home equity lines of credit are viewed as revolving credit and can lower score, particularly itf they are completely drawn down. If getting a home equity line of credit, try to get one with a limit of more than $35,000.
  • AMEX cards can look like a maxed-out revolving card. Pay them off before running credit.
  • Credit cards that don't report credit limit to the credit reporting bureaus always look maxed out to the scoring mechanism. Try to pay them off before pulling credit.


15% - Credit History

  • Age of the oldest trade line and the number of credit accounts
  • The most valuable credit facilities are those held for long-term. Close credit cards that you've held the longest last.
  • 3 to 5 cards seems to be the optimal number.
  • When you open new cards, this reduces the average combined time that all credit cards have been held, because you are now everaging in a new card with 0 time held. This can lower score.


10% - Number and Mix of Credit Type

  • Finance and company credit ("Buy the furniture now and pay nothing for 2 years") is bad for score. When creating the FICO scores, a high correlation was found between people with 90-day lates and lots of finance company accounts.
  • The number of open and closed accounts are part of the equation.


10%  - Number of Inquires for New Credit

  • Each inquiry could potentially lower your credit score 5 to 15 points
  • Inquiries more than 12 months old don't count against your score.
  • Promotional inquiries don't hurt your score ("You've been pre-approved for this credit card.") Only after you actually apply for the card will the inquiry actually count against you.
  • There is a 14-day window in which only one credit pull from a the mortgage industry will lower your score. the three credit bureaus figured out that a person will probably shop around for a mortgage and get their credit  pulled several times in a short period of time. In other works, you can have your credit pulled by 6 mortgage lenders in 14 days and only the first credit pull will count against the score.
  • If request your own credit report from the three credit bureaus, your score will not be affected. It is highly recommended that a first-time homebuyer pull their own credit at the very beginning of the home buying process.


Other Credit Facts

  • You don't want to open up more credit cards than you need.
  • Avoid interest-only cards. Making interest-only payments on credit cards can cause insufficient payments to be recorded for credit reporting purposes.
  • Divorce decrees state that one party has to pay all the joint bills. If that one person doesn't pay, the other person's credit score get hurt. This is a very common scenario. I see it all the time.
  • One little trick to quickly boost your credit score a bit is to have someone with good credit make you an authorized user of of a credit card that they have held for a long-time.

 

 

 

 

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Brought To You By
Mark Harmon, Realtor

CalHFA Preferred Loan Officer
USA Realty and Loans

Brokerage Main Office
3994 Carson St.
San Diego, CA 92117