Credit Scores Demystified

Guest post by Dan Lucchesi, owner and founder, The Lucchesi Property Group

If you’ve decided to get your credit on track, getting started can feel a bit daunting. After all, it can sometimes seem as if credit agencies want to keep you in the dark about how scores are calculated. Not to worry — with some diligence on your part and a little insight into the world of credit score-keeping, you can get back on track in 2020.

Credit scores follow an algorithm first developed by the data analytics company FICO years ago. For a while, credit scores weren’t the primary force behind a credit decision, but over time, the impact of a credit score became more and more important. Most every loan program available today has a minimum credit score.

There are five characteristics of your credit history that make up your three-digit score: your payment history, account balances, the length of your credit history, the types of credit used and how often you’ve applied for new credit.

Fair credit score report with pen and calculator

Credit scores will improve much more quickly by paying attention to the two categories that have the greatest impact on a score: payment history and account balances.

Payment History

Payment history accounts for 35% of the total score. When someone makes a payment more than 30 days past the due date, scores will fall. An occasional “late pay” won’t do much damage to your score, but continued payments made more than 30 days past due definitely will. Preventing late payments is a key to recovering your score.

Account Balances

Account balances compare outstanding loan balances with credit lines and make up 30% of your score. If a credit card has a $10,000 credit line and there is a $3,300 balance, scores will actually improve, as the ideal balance-to-limit is about one-third of the credit line. As the balance grows and approaches or exceeds the limit, scores will begin to fall.

Length of Credit History, Types of Credit Used and How Often You Apply for Credit

The remaining three have relatively little impact. How long someone has used credit accounts for 15% of the score, but there’s really nothing anyone can do to improve this area other than to wait. Types of credit and credit inquiries both make up 10% of the score.

By concentrating on payment history and account balances, scores will improve significantly over the next few months.

About Dan Lucchesi

Dan Lucchesi is owner and founder of The Lucchesi Property Group. He was influenced by his late grandfather, who developed and built homes as well as worked as a city home inspector, and by age 14, Dan knew real estate was where he belonged. He attended the University of Denver, and earned his master’s in real estate and construction management in 2010. While attaining his degree, he worked as an intern for an office developer and a REIT. Dan started his company, which was originally called Total Realty Advisors, in 2011. Contact Dan at 720-515-9791 or dan@totalrealtyadvisors.com.