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There are five main factors that determine what your credit score will be. |
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The largest of these factors is payment history. Payment history determines approximately 35% of your total credit score. How you have paid your bills in the past is called payment history. Credit cards, auto loans, and mortgages are common obligations that will be monitored on your credit and tend to report every month. If you are late once on one of these bills it will likely have lees of an effect than if you are late several times or on several different accounts.
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Second, The Balances on your open accounts or "amount owed" will determine approximately 30% of your total credit score. It's not that you owe a lot of money or just a little money it's how much of your available balance are you using? If you have a $10,000 credit limit and you have accrued a $1000 balance you are only using 10% of your available credit line. However, if you have a $1,500 credit limit and you are using $ 750 you have already used half of your available balance and this can decrease you score.
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Next, length of credit history will contribute to about 15% of your credit score. If you have had established credit for ten years, your likely hood of paying on a new loan is much easier to determine and will, with good payment history, give you a higher credit score than if you have only had credit for a short time.
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Credit history, more specifically, new credit, can account for approximately 10 % of your total credit score. If you apply for credit every once in a while it will have much less of an impact than if you apply for credit less frequently. If you are going to apply for credit try to make all of your credit inquires within a short period of time and limit them to only a few. These inquires will look like you are just shopping for a good rate. For example, if you are trying to buy a car, it would be wise not to have ten different dealers run your credit, or even five different dealers over a month and a half. Try to keep this all in a short time frame(less than a month).
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Finally, the type of credit you have. Much like your retirement account you should diversify your credit portfolio by having a mix of installment credit and revolving credit. If you have a few credit cards that have a low percentage of their max available amount currently owed, an auto loan, and a mortgage that you can afford would be a great start.
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Qualifying For Financing |
| Since the early 90's banks and finance companies participating in sub prime auto loans have relied heavily on a computer generated scoring system to determine the risk factor of a loan. In short, the higher the score the lower the interest rate. This program was implemented primarily to reduce the amount of loans in default due to non-payment. In their efforts to take some of the decision-making away from their loan officers they created what is known today as your Beacon score. |
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To eliminate the bad judgment factor they usually automatically declined applications that had too low of a Beacon score. This system proved to be adequate in reducing the amount of bad loans. However, over a period of time it became obvious that even though they had fewer loans in default, they weren't lending out enough money to stay in business.
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The solution was simple: Redirect the decision making process to those most qualified.
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This brings us to the point. Before a decision can be made on a loan, as a matter of policy they must verify your income and conduct a five-minute interview with you, the buyer. In most cases the approval will be based on your response to a couple of simple questions. Since the lender is concerned about the repayment of the loan, they will be interested in your budget.
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Lenders usually want to see no more than 18-20% of your total gross income going out for car payments each month. Additionally, if you have two people in your household you may qualify for two auto loans but you will still need to stay within the 18-20% of your total income for your monthly payments. See the payment calculator below to determine monthly payment availability.
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