Analzying Your Credit Score
By Paul Esajian on September 20, 2013
Breaking down your credit score is similar to understanding the mystery of the mortgage approval process. The basics seem easy enough, but it is much more complicated than initially thought. With mortgage approval, if you have a good credit score, a low debt-to-income ratio and a significant down payment, you would think you have a strong application. However, a slip up in one of those areas can cause your application to be denied. With your credit score, you may think that paying your bills on time every month would guarantee a high score, but just like mortgage approval, there is more than meets the eye.
Payment schedules are still the most important factor regarding your score, but availability of credit is a close second. Even though you may pay every bill on time, if you are maxed out, or close to maxed out, your score will take a severe hit. Ideally, you will only use 25% of your available credit. If you spread your debt around to get under this number, you will see an increase in your score.
According to a popular myth, every time you have your credit pulled, your score will automatically decrease. This is only true if you have your credit pulled multiple times in a 30 day period. Your availability of debt and timeliness of payments are still the most important factors. Bankruptcies, foreclosures, liens and current “lates” on active accounts will cause your score to plummet and may take some time to recover. Pulling your score a few times, when you are car or house shopping, is fine and expected. What you don’t want to do is have it pulled a dozen times by a dozen different lenders. That is a red flag that you may be getting denied for these loans and may be in some kind of financial trouble.
Your credit score is a moving target. Established employment and history of payments will help your score, but they can be diminished by one late payment or one newly maxed out credit card. Simply opening a new line of credit and paying on time for a few months will not improve your score alone. If you keep adding or subtracting debts, your score can greatly fluctuate from month to month. If you have a credit card that you recently paid off, keep that item open. This does not mean you have to use that card, but closing it will lower your score.
You should constantly monitor what is on your credit report. If you have a popular last name, it is not uncommon to find items that are not yours. If these items stay unreported on your credit for any length of time, it can become difficult to take them off. It is always easier to show that something is yours, rather than the other way around. There are plenty of free credit score monitoring sites available online. If you find something on your report that you want to dispute, the process of removing it and seeing a bump in your score could take weeks or even months. By that time, it could be too late for the house you want or to apply for credit you currently need.
In any given month, you should have an idea what is on your credit report and what your most recent score was. Mortgage approvals are based on tiers of what your middle credit score is from the three reporting bureaus. These tiers affect interest rate and sometimes even loan approvals, regardless of any other factors. Knowing what effects your score should help you improve it and may even save your next mortgage deal.