Do you request your credit report every year? Admittedly, I have to say I don’t. I’ve probably accessed it twice in the past four years. But after attending this week’s homebuyer’s class sponsored by the Bedford Central Community Development Corp., I was reminded of how important it is to monitor and review my report annually.
A credit report contains detailed information about your credit history including any late payments, bankruptcies, credit accounts, recent inquiries, etc. This week’s presenter, Deborah Johnson, vice president and relationship manager, for J.P. Morgan Chase informed us that payment history, outstanding debt, length of your credit history, types of credit accounts, and new accounts opened are all factored into your FICO Scores. They are calculated from a lot of different credit data in your credit report and are used to determine you credit worthiness or the likeliness that you will pay back the loan. Johnson explained how the three credit repositories, Equifax, Experian, and TransUnion, calculate your score:
Payment History: Accounts for 35% of your score. This includes payment on your credit cards, retail accounts, installment loans, mortgage, etc. “Pay your bills on time,” advises Johnson. “Payments more than 90 days late are weighed just as heavily as a bankruptcy or foreclosure,” she added. A solid record of on time payment helps your score.
Amount of Outstanding Debt: This looks at the number of accounts you have balances on, the amount you still owe on an installment loan, and the proportion of credit lines used-the amount owed and what is available on your credit line. Outstanding debt accounts for 30% of your score. Johnson advises that when you’re creating a wealth plan, your monthly debt should not be more than 20% of your monthly net income. For example, if you make $8,000 per month you should not have more than $1,600 in debt for that month. The more you owe compared to your credit limit, the lower your score will be.
Length of Credit History: Account activity, time since accounts were opened, and the types of accounts opened makes up 15% of your score. If you’re thinking about closing out some of your accounts, it is best to close the most recently opened accounts Johnson recommended. Your oldest cards reflect a longer credit history. But you can still have a high credit score if you have a short credit history. Johnson says that non-traditional credit can be presented. This includes rent payments, household bills, personal loans, etc.
Types of credit accounts: This include the various types of accounts such as credit cards, retail accounts, installments (car loans, student loans), mortgages, etc. It accounts for 10% of your score.
New Credit Accounts: Make up 10% of your credit score. This category looks at the number of recently opened accounts, the number of recent credit inquires, re-establishment of positive credit following past payment problems, and the time since recent account openings by account type.
Other posts in The Homebuyers Toolkit series:
LaToya M. Smith is an editorial assistant at Black Enterprise