Why Your Credit Score Is So Important

The credit scoring model seeks to quantify the likelihood of a consumer to pay off debt without being more than 90 days late at any time in the future.  Credit scores can range between a low score of 350 and a high score of 850.  The higher the score, the better it is for the consumer, because a high credit score translates into a low interest rate.  This can save literally thousands of dollars in financing fees over the life of the loan.                                                                                                                                                             Only one out of 1,300  people in the United States have a credit score above 800.  These are people with a stellar credit rating that get the best interest rates.  On the other hand, one out of every eight prospective home buyers is faced with the possibility that they may not qualify for the home loan they want because they have a score falling between 500 and 600. 

The Five Factors of Credit Scoring

 Credit scores are comprised of five factors.  Points are awarded for each component, and a high score is most favorable.  The factors are listed below in order of importance.

1. PAYMENT HISTORY-35% IMPACT

Paying debt on time and in full has the greatest impact on your credit score.  Late payments, judgments, and charge-offs all have a negative impact.  Missing a high payment will have a more severe impact than missing a low payment and delinquencies that have occurred in the last two years carry more weight than older items.

2. OUTSTANDING CREDIT BALANCES-30%

IMPACT

This factor marks the difference between the outstanding balance and available credit.  Ideally, the consumer should make an effort to keep balances as close to zero as possible, and defiantly below 30% of the available credit limit when trying to purchase a home.

 3. CREDIT HISTORY-15% IMPACT

This portion of the credit score indicates the length of time since a particular credit line was established.  A seasoned borrower will always be stronger in this area.

 4. TYPE OF CREDIT-10% IMPACT

A mix of auto loans, credit cards and mortgages is more positive than a concentration of debt from credit cards only.

 5. INQUIRIES-10% IMPACT

This percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a six month period.  Each hard inquiry can cost from 2 to 25 points on a credit score, but the maximum number of inquiries that will reduce the credit score is ten.  In other words, 11 or more inquiries within a six month period will have no more impact on the borrower’s credit score.  Note that if you run a credit report on yourself, it will have no affect on your score.

Remember that the credit score is a computerized calculation.  Personal factors are not taken into consideration when a credit report is generated.  It is merely a snapshot of today’s credit profile for any given borrower, and it can fluctuate dramatically within the course of a week.

Well the stock market ended up making a big rebound today with the dollar making some major gains finally!!  What was the reason behind this shift??  Well the S&P came out and said that there is an end in sight for the write downs by lenders due to the sub-prime mortgage fall out.  This is GREAT news for everyone.  Hopefully soon we can see home prices start to level off (good news for home owners), and everyone can have a more solid idea of value in places that were overpriced (good news for buyers).  Also, borrowers may eventually see a return of the higher loan to value programs (like MyCommunity etc.).  All in all, it gave everyone a reason to hope with a slight lowering of rates by the end of the day.  All of these Fed cuts have not translated into savings for borrowers due to the higher risk ratings that mortgage backed securities have been getting.  Hopefully they can be upgraded again to allow lower rates to prevail.  Either way, this statement is welcome news for the mortgage industry and the economy at large which has had to endure a huge hit due to the mortgage crisis.  So, as we go forward, I have no crystal ball but I sure do feel more optimistic!!