The following categories of information are considered in the credit score:

1. Payment history (35%): Past payment performance is given the most weight in the final score, as it is the most accurate predictor of future payment performance.

It is based on whether the applicant has paid credit obligations on time. It is negatively affected by the presence of serious payment delinquencies, frequent or recent minor payment delinquencies, such as mortgage payments over 30 days late, and collections, tax liens, judgments, bankruptcies or foreclosures in the public record. In the score, a payment that is 90 days late is more significant than a few payments slightly over 30 days late, and recent current payments are given greater weight than late payments made over one or two years ago. Because of the criteria used in calculating the score, it is difficult to improve a score with a sudden adjustment in payment habits. In fact, most attempts may cause a further reduction in the score. Therefore, a person who needed to improve his score in this area, or who wanted to assure no loss in points prior to applying for credit, should just:

• pay all obligations on time.

• bring all late or delinquent accounts current, and keep all accounts current.

However, bringing late accounts current will not significantly increase the score until the late payments have become over 12 months old.

2. Amounts owed (30%): Even an applicant with a satisfactory payment history is likely to miss payments in the future if he becomes overextended in his credit obligations. Therefore, the score gives second greatest weight to the total amount of debt outstanding, the number of credit card accounts and installment loans the applicant has open, and the percentage of the credit limit being used on each account. This score is negatively affected by high and/or increasing loan and credit card debt.

This score can be improved by:

• not incurring new debt prior to applying for the mortgage loan.

• keeping total debt low in relation to income.

• having some, but not too many credit cards, e.g., 2-4, to show an ability to handle debt without becoming overextended.

• keeping credit card balances low and well below credit limits, by paying them down.

• not consolidating debt to one or two credit cards. Because FICO scoring considers the percentage of the credit limit being used on the cards, canceling credit cards and moving the small amounts of debt that were on them so they then appear as a larger debt on one card, may cause a reduction in the score.

3. Length of credit history (15%): This part of the score considers the age of the oldest account, the average age of all accounts, and the length of time certain accounts have not been used. The score is affected positively by a long credit history, showing the applicant’s ability to pay debts. To maximize the score the applicant should:

• not open credit card accounts merely to create a credit history. While opening an account will create a history, it will also lower the average age of the accounts, thus negatively affecting the score for length of credit history.

 • not close older accounts, unless they are not being used, as this will reduce the average age of the accounts.

 • use the accounts one has. Keeping an old account because it increases the average age of the accounts has little value in the scoring if the account is not being used.

4. Types of credit in use (10%): This measures the mix of credit sources, e.g., credit cards, retail accounts, installment loans, finance company accounts and mortgage loans, used by the borrower. This factor rewards those who have shown they can manage credit card debt responsibly. It penalizes those who have used finance companies, rather than other less costly sources of credit, even if the payments have been made in a timely manner. Ways to maximize this aspect of the score include:

• having a checking and savings account.

 • avoiding finance companies.

5. New credit (10%): This measures the applicant's recent credit attempts to obtain new credit. This is negatively affected by accounts opened within the last 12 months and recent credit inquiries. Because each credit inquiry suggests the applicant is trying to increase the amount of credit, credit inquiries will lower the score. However, credit inquiries made within any 14-day period for the same type of loan, are counted as a single inquiry, as they would reflect an attempt to get the best rates for one loan, rather than to obtain multiple loans. Methods of maintaining a good score include:

• making all rate inquiries for a loan within a 14-day period, rather than over an extended period.

• applying for new credit accounts only if really needed.

• prior to applying for the mortgage loan, not applying for new credit, e.g., for a car loan, or for new credit cards, even if they have lower interest rates and are to be used only to pay off existing credit card debt.

Good Luck On Improving Your Credit Scores