December 3, 2008  
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Featured Issue: Know the Score on Your Credit Score

Where Does Your Credit Score Come From?

Your credit score is based on a short list of factors that are constantly being reviewed by credit reporting agencies.

  1. What's Your Payment History?
    Do you pay on time? This factor alone is going to count for 35% of your total score because it's the first thing any lender wants to know.

    The payment history they will be looking at includes:
    • Credit cards, late payments; how many, how often
    • Mortgage loans
    • Department store cards
    • Gas company cards
    • Installment accounts, such as car payments
    • Finance companies
    • Bankruptcies
    • Liens, judgments or collections

  2. How Much Do You Owe?
    Owing money is a good indicator to lender, as long as you don't owe too much money to too many creditors. This factor counts for 30% of your overall credit score.

    Here's what they look at:

    • Are you overextended?
    • What's the total owed on all your accounts at the end of each month? Is it holding steady or shrinking? Especially on credit cards and installment loans.
    • How much of installment loan accounts remains to be paid? The less the better.
    • Do you pay off small regular credit card balances monthly? That's a good indicator.
    • Do most of your accounts have balances? If so, it can indicate the risk of over-extension.
    • What percentage of your total credit line is being used on credit cards or "revolving credit" accounts? If you're "max'd out" on too many credit cards you might be too high a risk.

  3. How Long is Your Credit History?

    Length of credit history represents 15% of your credit score In general. Even so, people with short credit histories can get high scores, depending on other factors.

    This measurement considers:

    • What's the average age your oldest account and the average on all your accounts.
    • How long have certain accounts been established?
    • When was the last time you used specific accounts?

  4. How Much New Credit Do You Have?

    Statistically speaking, if you've opened several new accounts in rapid succession - especially if you have a brief credit history - you suggest someone who is a higher risk. This factor represents 10% of your credit score.

    Credit report issues associated with this factor include:

    • Requests by a lender to get a copy of your credit report, often referred to as an "inquiry".
    • When was the last time you opened a new account?
    • What's the total number of newly opened accounts you have?
    • How long has it been since credit report inquiries have been made?
    • Do you have a record of recent credit history following previous payment problems? This is not an automatic credit score killer. Re-establishing credit after a period of late payment behavior will help to raise your score.

  5. What's Your Credit Mix?

    Here's a final 10% factor that takes into consideration the overall types of credit you use. That mix can include:

    • credit cards
    • mortgage loans
    • installment loans
    • finance company accounts
    • retail accounts

This factor is mostly used if the rest of your credit picture is incomplete or vague.

What's a Good Score?

Credit scores usually range between 375 and 900 points.

For Mortgages . . .
A credit score of 675 would be considered very good. If your score tops out at 625 it'll draw closer attention, and may trigger a demand for a larger amount of down payment or a higher interest rate.

For a Car Purchase . . .
A credit score of 675 would be extremely good.

Bottom Line?
Credit reporting agencies arrive at their credit scores independently. It's not a hard-and-fast science. So, although your score does count, it can vary from lender to lender.

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