Credit Score Factors Pie – Lesson #2

March 25, 2008 by  
Filed under Credit Score Lessons, Favorites

We love the saying “It’s all about the pie”. Not this pie. Rather, it’s about the Credit Score Pie.

Credit Score Factors

Once people get their credit scores — and if you haven’t done this already you should – anyway, once they get their credit scores, they tend to look at their credit report and see that they may have a couple of items flagged for impacting their credit score. The gut reaction is to treat these all equally. Or, worse, focus on the easiest item. That’s a mistake.

The most commonly used credit score, the FICO score, is made up of 5 credit factors. Here are the 5 pieces and the percentage of the score each piece accounts for.

Payment History – 35%
Amounts Owed – 30%
Length of Credit – 15%
Credit Inquiries – 10%
Mix of Credit – 10%

The irony is that it’s really not all about the credit score pie, it’s mostly about the biggest pieces.

Payment History and Amounts Owed. These are the biggest credit score factors and nobody has a great credit score if these are out of sync. That’s because they represent nearly 2/3rds of your credit score.

Payment history is critical and as the name suggests time is your best ally to impacting this area. The key lesson is that a late payment in the recent past hurts more than one a few years ago. In fact, all your history is wiped clean after 7 years, unless you had a bankruptcy and then it’s 10 years. Net, net, if you aren’t paying on time, you have to figure out how to do this now. You can’t be late and still have a good score. Being late on payments a month before you hope to get a major loan is a no-no.

Amounts owed are all about Credit Utilization. What? A fancy term for the ratio of what you can charge – your credit limit – to what you do charge – how much of that credit limit you use. Let’s look at an example; Jack and Jill have the same credit limit on their cards, yet Jill uses her card less so she has a 25% ratio. It turns out that risk experts say people who use more of their limits are more risky. While many sources say a credit utilization ratio of 40% is fine. Someone with a 775 and higher scores tend to have about card utilization ratios in the 10% range. In short, don’t overuse your credit cards.

Mix of Credit. This wedge says that people with installment credit and revolving credit tend to be less risky than people with just one or the other and thus have higher credit scores. Installment credit examples are auto, home and personal loans. The most common revolving credit is credit cards.

Length of Credit. When it comes to length of credit just start early and stay on it. You can’t change time. If you are young, you want to start developing good habits now, so when you are ready to make a major purchase you have a few years of good credit history. Don’t cancel any credit cards with long credit histories.

There are 2 types of inquiries: Soft and Hard Inquiries. A soft inquiry is whenever you, for example, check your own credit score, or pull a credit report on your own. Soft inquiries are non-score impacting because they are not requests for new credit. Hard inquiries are requests for new credit. An example of a hard inquiry is applying for credit like getting a cell phone, or a credit card. So why do hard inquiries ding your score? It turns out that people who request credit more frequently are more risky, so the credit score reflects this.

Our experience is that most people love to focus on credit inquiries. While they shouldn’t be ignored, it’s only 10% of your score. When it comes to credit inquiries, timing is more the issue, don’t apply for credit at the same time when applying for a loan.

Also, don’t let credit inquiry fear stop you from shopping around for a loan, in most cases all credit inquiries in a 30 day window are considered as just 1 inquiry, and the industry to trying to move this to 45 days in the future. Note: this is true for home loans, but not for car loans and personal loans, so be cautious.

In summary, spend most of your effort around the biggest two credit score factors: Payment History and Amounts Owed, by paying on time and keeping your balances low.

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5 Responses to “Credit Score Factors Pie – Lesson #2”

  1. L.A. Ockey on January 12th, 2009 10:29 am

    When shopping for a loan, why not pull your own credit report, since it is a soft inquiry, to show potential lenders with the provision that the rate info that they quote you will be dependent on a similar credit rating. Then, and only then, when you have selected a lender allow that lender to make their standard hard inquiry directly.

  2. awjolls on January 12th, 2009 11:18 am

    That’s exactly the approach to take. You want to wait until the near-end to get the hard inquiry. They won’t lock the rate until then, but you shouldn’t get any surprises. The key is getting your FICO scores as those are the scores that lenders will use.

  3. renee on December 17th, 2009 6:25 am

    Would you clarify about making payments on time?

    Are you talking about just credit payments? Or, are you talking about ALL payments, such as utilities, mortgage, phone, insurance, etc.

    In order for a late payment to a vendor to show up on our credit score, does that organization have to “report” our late payment, or does it automatically get documented with the credit bureau somehow?

    Our paycheck period and our mortgage due date are off by one week each month. The grace period for payment is 15 before a late fee is charged. We always pay our mortgage after the due date but during the grace period. When you say that making payments on time is a primary factor, does that mean that our practice of paying one week into the grace period is keeping our score down?

    Your website is very helpful. Thank you for this lesson!


  4. VideoCreditScore-Andy on January 20th, 2010 9:35 pm

    Sorry for the slow response.
    Utilities, insurance payment history doesn’t show up in your credit report. Focus on ccs, home loans, auto loans, personal loans and cell phone bills.

    Yes, a company has to report payment history, but most larger companies have direct systems with the credit bureaus.

    Paying on time means paying by the end of the grace period. Your real due date for things like mortgage payments is the last day of a grace period.

  5. Dimitrios on April 15th, 2011 4:19 am

    I am a mortgage professional.

    In response to the question of paying your mortgage payment during grace period. This will not hurt your credit.

    The real due date is not the grace period though. It is the date the payment is due. A “late” payment is only reported if it is 30 days late. IE: if your payment is due on May 1st, as long as you pay by June 1st, you will not have a late payment on your credit.

    Having said that, I would not encourage that, since you will pay a penalty AND if for some reason your payment does not go through or they record it a day late, you will tarnish your credit.

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