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Answering all those burning questions you didn’t know you had about home ownership.

Credit Mysteries, Explained (Part 1 of 2)

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Jessica Dabkowski

Helping you with all things homeownership!

Take a journey with me into the murky depths of your credit score. This IS credit mysteries, explained. (I hope you are hearing the Unsolved Mysteries theme song right now.)

This week a client had some questions on credit scores (hey, K!) and specifically, on how “hard” credit pulls impact credit. I figured credit reports are a great topic to cover in our weekly fireside chats. It’s a ton of information to digest, so I’m breaking this into a two-part series.

Credit scores drive so much in our financial life. Lenders use your credit score to size you up as a potential risk. Your credit score can be the difference between qualifying for a loan or not. Other places credit score comes into play include car insurance, credit cards, landlords, employers, utilities and some government agencies.

With this information in mind, it strikes me as unfair that much of the information around credit reports is nebulous at best. Shade city, man. Let’s try to parse out some of these credit mysteries, explained.

Disclaimer: This article is informational in nature and should not be considered advice for your personal credit situation.

Why You Should Know Your “Exact” Credit Score

Are you giving your credit score the attention it deserves? If you are considering taking out any kind of loan, whether it is a mortgage, a car loan or personal loan, make sure you understand your score and what you can do to make it more attractive to lenders.

I have “exact” in quotation marks above because you actually have a bunch of credit scores. SURPRISE! Every game in town wants their score to be the one everyone uses.

Most commonly, when someone references your credit score, they are referring to your FICO (from the company name, Fair Isaac Corporation) score. Transunion, Equifax and Experian have banded together to create “VantageScore”, a competitor to FICO. FICO has been the “gold standard” for a long time (it is almost as old as I am!), but others are trying to make inroads into that gravy train.

This score is the one lenders pay to acquire when they are reviewing your application for credit.

Credit score example pulling from Transunion and Equifax.
Keep an eye on which scoring system your credit score is utilizing.

How Is Your Credit Score Determined?

Your FICO credit score is one way (and generally potential lenders consider it to be the best way) a lender can determine if you are a responsible borrower and if they should take a risk and lend you money. (And the abbreviation FICO brings to mind the funny but unrelated words of Rachel Green, “Who’s FICA? Why’s he getting all my money?!)

Your credit score has nothing to do with your income or investments. Your credit score is based on how you’ve handled your credit card payments and other loan payments, like your car or student loan or your current mortgage. Some landlords will report your rent track record to the credit bureaus as well.

So let’s dig a little deeper into what factors make up your credit scores.

1. The Big Daddy: Payment History

Your on-time payment track record is the largest chunk of your score. Your potential lender wants to know if you are a person who honors their debts. If you are a person who makes their payments on time and as-agreed, you look like a good bet for the lender.

Late payments, missed payments, bankruptcies and collection information gets captured in this part of your score. The score looks at credit cards, loan payments and any other type of credit accounts requiring payment. For those of you with student loans, making timely recurring payments is a good boost to your score. This side benefit is one of the few bright sides to your student debt, so revel in it!

It also takes into account if you’ve declared bankruptcy, have a tax lien, or if you’re being sought by a collection agency.

2. How much of your credit are you using?

The next factor is the ratio of how much of your credit you are actually using. They style it as a percent and for this percentage, LESS IS MORE, DAHLING! It takes into account your total credit limit (i.e. the sum of all your credit card limits) and pits it against how much credit you are actually using (i.e. the sum of all your credit card balances).

For example, if you have $10,000 of total credit available to you and you have a balance of $3,000, you are using 30% of your available credit. (This is too high, my friend!)

I said “balance” because the score only cares about the balance on the cards as of that moment in time when your credit card last reported your balance. Even if you pay off your card(s) in full every month, it will not factor that action in for this part of the score.

TIP FROM DABS: If you know you are going to have your credit pulled and you use credit cards, I recommend paying your cards off weekly for the 5-6 weeks in advance of your application. This trick keeps your credit usage balance extremely low, and you are not at the mercy of when your credit card company last reported your balance to the bureaus. You still get your points, cash back or miles, but you boost your score.

3. New credit

Nothing makes lenders more nervous than seeing someone go on a new credit spree. If you open a bunch of accounts back-to-back, lenders wonder about your motivation and whether you will honor all those accounts.

4. Length of credit history

This category is a little bit of a tricky one. Adding credit can help some parts of your score (like your percentage of credit used) but it hurts this category because it brings down your average length of credit history.

TIP FROM DABS: Keep those old credit cards open, even if you use them once per year to keep them active. We all move on to greener pastures for better points, cash or miles, but keep those old flames with you. (I’m doing that thing with the mixed metaphors again, aren’t I?)

I had a Capital One card I got when I was in high school (Thanks Tim and Tina for getting me on the credit train early!). I let it lapse about five years ago (just lazy), and it definitely dropped my average length of credit history down.

Open new cards judiciously because new accounts will also drop this number down.

5. Hard Inquiries

A “hard inquiry” is when a lender or creditor checks your credit in response to an actual application for credit. (A “soft” inquiry is when credit is pulled for other reasons such as when your bank provides you a free credit score.)

If you have a lot of hard inquiries on your record, lenders get nervous (really squirrelly, these lenders!). The score differentiates between applications for a bunch of new credit versus shopping around for a good loan rate.

If you are shopping for a new loan, whether its car or mortgage or whatever, the scoring gods each have a set period of time they use to group the inquiries together.

Of course, the time frame varies and in my research, I found everything from 14 to 30 to 45 days referenced. Honestly, to play it safe, I would keep it to 2-3 days so it really does show up as a single blip on the radar.

According to this article at, how much it actually impacts your score varies based on your personal credit history (hello, murky mystery!). The article says one additional credit inquiry will take less than five points off their score for most people. For people who have shorter credit history or fewer accounts, it can be more.

Credit Mysteries, Explained

Join me next week for Part 2 of our Credit Mysteries, Explained series. As always, I’m here to help you with all your home ownership questions, concerns and dreams. See you next time!

Photo by RODNAE Productions from Pexels

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