What is a Credit Profile?
Your credit profile is a history of your credit behavior. Your credit history is compiled by credit reporting agencies that receive your financial information from certain creditors. It is worth noting that not every creditor reports financial information to the credit reporting agencies, however, most major banks and companies that grant credit to consumers do report financial information regarding their customers to the credit reporting agencies. The credit reporting agencies use the financial information about a consumer to formulate a credit score. Many lenders and companies that grant credit to consumers utilize consumer credit scores to determine if they will grant credit and how much credit they are willing to grant. Sometimes interest rates on loans are determined by lenders based upon the borrower’s credit score.
Key Factors That Make Up Your Credit Score
Credit scores are often referred to as “FICO Scores,” an abbreviation named after the company that invented the score – Fair Isaac Corporation. The FICO score scale ranges from a low of 300 to a high of 850 (perfect score and very rare). FICO scores are comprised of five key factors, each having a certain role in calculating the total score. Let’s begin by reviewing those five key factors in order of importance.
A). History of Payment
This key factor represents approximately 35% of your total score. History of payment represents your track record of paying your debts in a timely manner. It also includes the number of past-due accounts, how late they are past due, bankruptcies, foreclosures, etc. The more accounts that show timely payments, the higher your credit score will be. In addition, the more current open accounts that show timely payments, the better your credit score will be. Remember that your credit report may show accounts that are no longer open. Currently open accounts generally carry greater weight than older closed accounts.
B). Outstanding Balance and Available Credit
This key factor represents approximately 30% of your total score. Have you ever heard the saying, “It's easy to borrow money when you don’t need it”? It is ironic that most lenders are eager to lend money to borrowers who don’t need a loan. The FICO score model measures how much money you owe and also the ratio between what you owe and what your credit limit is. In simple terms, the model evaluates whether you are “maxing out” your credit cards and other debts. Some credit restoration experts indicate that a rule of thumb is that an ideal ratio of outstanding balance to credit limit is 30%. For example, if you had a credit card with a $10,000.00 limit, a $3,000.00 outstanding balance would have a positive impact on your credit score.
C). Length of Credit History
This key factor contributes approximately 15% of your total score. The longer that an account has been open and active, the more significance it will have in evaluating the account as compared to other accounts. For example, if you had three accounts that had been open and active for five years, the credit history on those accounts would carry more weight than the credit history of two accounts that you had just opened six months ago. Generally, a minimum of 6 – 12 months of credit history is needed to generate a credit score.
D). Number and Types of Accounts Held
This key factor accounts for approximately 10% of your total score. The number of open accounts is evaluated by the FICO score model. A large number of open accounts can be an indicator that a consumer is over-extended in debt. Too few accounts can indicate a consumer’s inability or inexperience as a borrowing consumer. A balance is obviously what you should strive for. Similarly, the type of accounts held plays a factor in this area. A consumer with installment loans, revolving credit cards, and a mortgage may be considered more educated in borrowing and managing their finances than an individual with credit card debt only.
E). New Credit
This key factor also accounts for approximately 10% of your total score. The number of new accounts opened (or attempted to open) is evaluated by the FICO score model. In this regard, the opening of many new accounts in a short period of time is often interpreted as a warning sign that a borrower is attempting to stay afloat financially amidst a pending financial obstacle. Numerous inquiries by creditors during a short period of time can also impact a FICO score negatively, especially if the individual does not have a lengthy credit history. Inquiries should be kept to a minimum in order to optimize this factor of the total FICO score.
Will Foreclosure Impact My Credit Profile?
Yes, a foreclosure will negatively affect your credit profile. Unfortunately, it will not be possible to have your cake and eat it too! The good news is that it does not have to ruin your life. You may take advantage of the financial benefits of the Stay, Don’t Pay methodology; however, initially your credit score will most likely decline due to the delinquent mortgage and ultimate foreclosure. The foreclosure will remain on your credit report for approximately seven years, but it will carry less weight as time goes on. The best route to rebuilding your credit profile after the foreclosure is to begin immediately with the effective credit restoration steps.
Improving Your Credit Score
- Pay your debts before they become thirty (30) days past due.
Apply for credit only when necessary. Opening too many credit cards in a short amount of time can be harmful to your credit score. Attempt to wait three months between opening new accounts.
Keep credit card and credit line balances at approximately 30% (or less) of the available credit limits.
Make more than the minimum payment on credit cards (if possible).
Maintain a variety of credit account types, such as revolving (varied monthly payments, such as credit cards) and installment (regular monthly payments, such as auto loans).
The longer your credit history, the better. Canceling an old credit card could hurt your credit score, because it may shorten the length of your credit history.
Review your credit report at least annually to identify any errors or unauthorized accounts.