“How is my credit score determined?” ask buyers of Palos Verdes real estate. The chart above details the scoring system used by Fair Isaac, the creator of the FICO score, one of the most widey used credit scoring methods employed by most banks and lenders in the United States.
What surprised me is that Payment History (35%) is twice as important as Length of Credit History (15%) . Making even a small payment on time is important to your overall credit score. Amounts Owed (30%) is a little more complex as it includes the total balances on each one of your lines of credit in proportion to the amount of total credit available. For example, if you have only two lines of credit open, each with a $5,000 credit limit, and both lines of credit have a $4,000 balance, you will be left with only 20% of your total credit available. This can seriously drag down your credit because you are viewed as possibly overextended, and you have little credit left over to leverage your high debts.
For this reason, closing credit cards or other credit lines will lower your total available credit, and will likely drop your FICO score. It may be wise to periodically raise the credit lines on your credit cards as a means to increase your total available credit, without having to open new credit cards unnecessarily. Having too many lines of credit open can have a negative impact on your credit score.
Speaking with a good lender or morgage broker before making your real estate purchase is the best way to learn how you can improve your credit score.
Above chart courtesy of Progressive Title
