Dan Marchiando's Mortgage News Blog

Thank you for taking the time to read my blog post about matters affecting homeowners. I was happy to hear from many of you who read my last blog post about pulling credit on AnnualCreditReport.com. If you missed reading it, you can still see the information on my website here. If you don't want to read the whole thing, you can get a quick video synopsis by viewing this video produced by the FTC here. 

So hopefully you pulled your credit last month using AnnualCreditReport.com, and probably you have some questions. Give me a call or shoot me an email--I'm happy to help.
 
There are a couple of common misconceptions about credit reports and scores, that seem to have a life of their own. One is that pulling your credit will somehow lower your credit scores. This is not true if you, the consumer, pull your own credit report. This is only true if a lender or bank pulls your report. The effects of one or two inquiries by lenders is pretty minimal, and multiple inquires very close together--as happens when you shop for a mortgage--are only counted as a single inquiry. You can see in the following chart, that inquiries are one of the least important of 5 different components of credit scores. So no excuses--check your credit.
 
The second misconceptions I hear about over and over is that it is possible to have too much available credit, or too many credit cards with big credit limits. This is also not generally true. What the scoring model looks at is utilization of the available credit, and outstanding balances. Here's an example of utilization: I have a Visa or Mastercard with a credit limit of $10,000, and I regularly charge about $1,000 on my card every month, paying off the full balance each month. My utilization in this case is 10% ($1,000 divided by my $10,000 credit limit). From observation of many credit reports and scores, I believe that the best scores can be achieved with utilization in the range of 7% to about 35%, and balances in the range of $600 to $2,500.
 
Fair Isaac is generally guarded about the makeup of their FICO scoring model, but they have stated that these 5 categories--listed in order of importance--make up our FICO scores. You can also see that these 5 categories carry different weights, with Payment Habit being the most important, and carrying the most weight.

1. Payment History or Habit - 35%
The largest factor in a credit score is payment habit. Credit blemishes pull down scores based on four metrics: Recency, Size, Severity, and Number. Recent late payments, large late payments, very late payments, and lots of late payments do the most damage to credit scores.
 
2. Balances or Amounts Owed - 30%
Large balances owed, lots of accounts with balances, and high utilization of credit affects 30% of a credit score.
 
3. Length of Credit History - 15%
A longer credit history of on-time payments will increase scores. The average age of active accounts, and the age of the oldest and newest accounts are all factors, so resist the temptation to close your oldest accounts, or open un-needed new accounts.
 
4. Types of Credit Used - 10%
While not a key factor, this category rewards borrowers who have a history of using a mix of different types of credit, like credit cards (called revolving), installment loans (like car loans), and mortgages.
 
5. New Credit - 10%
Also not a key factor, this category considers the recency and number of new accounts and the recency and number of credit inquiries by credit granters like banks and mortgage companies.
 
You can read more about this subject at MyFICO.com.
 
Thanks for your interest.

Sincerely,

Dan Marchiando