Credit scores from the three major credit bureaus have always been shrouded in mystery. Along with this mystery are many myths floating around out there as to why someone might have a low credit score. While what goes into creating a credit score is well guarded proprietary information, there are some solid things that do affect the score someone may have. Here are some of those things that affect a credit score:
Revolving credit has a major impact on someone’s credit score. Both the amount of credit that they have been granted and the amount of the credit debt they have is also a factor. You may have seen “revolving available” or “credit available” on your credit report. If that number or percentage is large that’s a good thing. To put it simply it shows that you haven’t maxed out your credit cards. Conversely if the percentage of available credit is low or zero you may be a candidate for bankruptcy in the eyes of the potential creditor. This goes hand in hand with the amount of credit card balances you are keeping. High credit card balances are A red flag that you may be in over your head, at least in the eyes of that potential creditor.
Installment debt is similar to revolving credit. Paid off installment loans like cars, houses, appliances, etc. shows a potential creditor that you have met your obligations in the past. Too much installment debt still showing open could be a concern for potential creditor. Like revolving credit, a potential creditor does not want to see you having too many open accounts.
Making timely payments is an obvious influence on credit scores. Showing late payments can dramatically bring down a credit score especially if those late payments are 60 or 90 days late. Late payments on the mortgage can bring the score down even further. Late payments on revolving credit seems to have a greater impact on credit scores then on installment loans. I think the idea here is late payments on revolving credit is another indicator of a possible future bankruptcy.
Although serious derogatory’s on your credit report can bring down a credit score big time, some are not as bad as you may think. For example, a discharged bankruptcy can often result in a dramatic increase in a credit score assuming the bankruptcy cleared out all previous debt and there are no current derogatory’s on the report. We have seen credit reports with tax liens still score in the 700’s. Collection accounts and judgments however do bring down a credit score significantly. Even satisfied judgments and paid collection accounts still seem to have a negative effect on the overall credit score. Child-support is another killer. If it’s on a credit report showing late chances are that score will be very low.
We have customers frequently tell us that they’re low credit score is a result of too many inquiries. While nobody knows for sure how much inquiries affect your credit score they do not bring down a score significantly in most cases. Exceptions to this is when a potential truck lender shops your application to several lenders (i.e. 20+). This gives a potential lender the impression you may be purchasing several trucks. They will not want to approve you for financing if they feel that you’re taking on too much debt at once. But for an average number of inquiries on your credit report we have not seen that affect credit score significantly.
After having seen thousands of credit reports over the years these are the main influencers of a credit score. As I stated earlier I’m sure there are a lot more factors involved but I have no idea what they are to be perfectly honest. Sounds like common sense but if you want to have a healthy credit score keep your revolving credit low, pay your installment loans on time, and avoid serious derogatory’s if at all possible. And stop worrying about your inquiries assuming you’re not passing out a credit application to 20 people per day.