Credit scoring can be somewhat of a mystery to the everyday consumer. Borrowers typically have a pretty good handle on the status of their credit. Bills come in every month and they’re paid on or around the due date. Sometimes though those accounts aren’t paid when due and if a payment is made more than 30 days past the stated due date, that late payment can be reported to the credit bureaus which will drive down credit scores.
There are three such bureaus, Experian, Equifax and TransUnion and each uses the very same algorithm to calculate the three digit credit score. These scores range from 300 to 850. A single late payment won’t hit scores all that hard, especially if the payment is isolated and there are no patterns of consistent late pays. Yet for some, there are late payments piling up which pulls scores down. Most often these late payments are the result of some third party influence or event such as the loss of a job, divorce or other life events.
When these events do occur, scores will fall rather quickly. This is important in the mortgage world because most every loan program in today’s marketplace asks for a minimum credit score. For those experiencing low scores, it’s not a lifelong situation. When whatever event caused these lower scores is solved, there are ways to boost scores much faster compared to just waiting for scores to rise on their own.
The first is to understand how scores are calculated. There are five primary factors that result in the final score, some more important than others. The five are payment history which contributes 35% to the total score, account balances at 30%, how long you have used credit tops out at 15% followed by types of credit used and new accounts each contribute 10% to the final score. Now let’s do a little math together and review each category.
How long someone has used credit really can’t be altered. There’s nothing a consumer can do to affect this number other than time. Someone who has responsibly used credit over a longer period of time will be rewarded with better scores compared to someone just entering the credit marketplace. Multiple inquiries and brand new accounts can also negatively affect a score. When increasing scores is on your list, don’t open up any new accounts, especially within a relatively short period of time.
Take another look at the percentages. You’ll notice the first two categories contribute almost two-thirds of the total score, payment history and account balances. Payment history means not making any payments more than 30 days past the due date. Account balances should also be kept around one-third of available credit lines. Scores will rise if a credit card balance is $3,000 and the credit limit at $10,000, for example. You can directly affect your scores by concentrating on these two important categories.
Creditors can report payment patterns and credit history once per month. By making timely payments and getting balances down to the ideal level, credit scores will begin to rise in as little as 60 days. This time frame gives the reported information time to populate the database. For someone wanting to achieve higher scores, concentrating on payment patterns and account balances is the fastest way to a better score.