Credit Scores

The major factors that contribute to credit scores are well understood, however - nobody except the owners of the proprietary formulae can accurately compute your individual credit score. Being punished and/or rewarded for a credit score derived by a secret formula is akin to being ticketed for violating a traffic law that you are prevented from knowing about. Unfortunately, that is the way it is, but contributing factors are as you might expect. Factors that negatively impact your credit score include: liens, accounts filed for collection, delinquent accounts, late payments, balances too close to the credit limit, too many recently opened accounts, too many recent credit inquiries.

Factors with positive impacts include a record of prompt payments, loan balances well below the credit limits, and few or no recent inquiries. These factors all make sense, however there is also what we call an accelerator factor - a factor that magnifies the impact of negative and positive factors. And the accelerator factor is time.

The more current the negative item the greater the negative impact credit scores. Conversely, the more time that has lapsed since a negative item the greater the positive impact on your score. For example, a late payment to Macy's last month has a worse impact than a late payment six and a half months ago. And a late payment more than two years ago may have no negative impact at all.

One rather curious thing about the time factor is that it is better to not pay off a collection that was filed more than six months ago in advance of applying for a loan. This is true because making the payment will bring the account within the more damaging six-month window and this will adversely impact your score. It is better to wait and pay the collection account off in escrow. If you compare credit scoring to a camera it may make more sense. Like the scoring algorithms, a camera is neither logical nor illogical. It merely records what it "sees." And in the given example, it sees a collection transaction.

A couple of websites that are helpful if you want information about your credit report, credit scores in general and your own score in particular are: