Each of the three major credit bureaus uses a scoring method for rating their consumers. Equifax calls it a BEACON Score, Trans Union the EMPIRICA Score and Experian the FAIR ISAAC, or FICO.
These scores range from a low of 300 to a high of 850. Average borrower has a score from the mid-500 to the mid-600 level. Less than half a percent of the population has a score above 800. The following is a list of what the credit bureaus base a score on:
- 35% Bill Paying Habits. A timely payment history will maintain a high score, but any late payments will subtract points. A string of 30-day late payments is worse than one 60Źday late.
- 30% Amount owed vs. Available Credit Limit. Keep balances at or below 30% of the available credit limit for maximum points.
- 15% Credit History. Keeping an old card even at a higher rate could help the score. Points are given to those who use credit cards actively and responsibly.
- 10% Credit Blend. A good combination of installment and revolving debt gains the most points here.
- 10% Pursuit of New Credit. Every time an industry pulls a person's score, the pull is lumped into a Standard Industry Classification (SIC). There is a 30 day window of time where all pulls inside a SIC count as one bureau (via the Acorn Act). Credit cards are not covered under the Acorn Act, being general credit grantors, so each pull counts as one bureau. This rule applies to installment loans.
- Minimize credit inquiries. Shop for cars and mortgages all within a 30-day time period. Do not over apply for general credit (credit cards).
- Pay bills early.
- Pay off revolving credit card balances each month.
- Never close a credit card account.
- Don't switch credit cards to get the best rate every few months.
- Keep the oldest credit account on the credit report.
- Never have more than two major bank cards in your own name.
- Never use over 50% of available credit on a card.
Many rapid re-scores raise FICOs by 30, 50 or more points, depending upon the nature of the errors in the file. That jump in score can save thousands of dollars in interest in fees over the term of a mortgage.
We already covered the Acorn Act, under which multiple auto or mortgage inquiries in any 30-day period count as just one inquiry. In addition, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. What this means is if the borrower finds a home loan within 30 days, their score will not be affected. Their score will, however, increase in the month following this time.