As we continue to see and hear the news about the credit crunch and mortgage crisis, I have had a lot people confused about what makes up their credit score (FICO score).
Lending now a days are stricter in lending than ever. That means your weight on your credit score will be very high in order for you to get a loan. Lenders are not only looking at your FICO score, but your whole financial structure.
I took a class on FICO scoring and TurnKey Solutions gave us some great information I would like to share with you. The following information will talk about what a FICO score entails and how much weight is put on each factor.
Definition of FICO - FICO is an acronym for Fair Isaac Credit Organization, the company that developed the system. A standard credit score which makes up a substantial portion of a credit report that credit bureaus sell to lenders so they can asses an applicant’s credit risk and whether to extend them credit.
The FICO (credit score) has five factors that affect your score:
1. Your Payment History (35% weight on your score)
Make sure you pay your any credit accounts ontime. Late payments, bankrupties, foreclosures, etc. can affect your score dramatically.
2. How much you owe (30% weight)
FICO scores look at the amounts you owe on all of your accounts, the number of accounts with balances, and how much available credit you are using. You do not want to max out your credit or go over your credit limit as that will also lower your score. The best policy is to owe only about 30% or less from your credit limit. For example if you have a credit limit of $1000, having a balance of $300 is good vs having a higher balance. You also want to make sure you pay that balance off every month.
3. Length of Credit History (15% weight)
The longer you have credit history the more you credit score will increase. However, even though you may have a short credit history, as long as the rest of your credit report shows responsible credit management you can get a high credit score.
4. New Credit (10% weight)
If you have recently applied for or opened a new credit accounts, your credit score will weigh this fact against the rest of your credit history. FICO scores distinguished between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you need a loan, do your rate shopping within focused period of time, such as 30 days, to avoid lowering your FICO score.
5. Other Factors (10% weight)
Several minor factors also influence your score. For example, having a mix of credit types on your credit report-credit cards, installment loans such as a mortgage or auto loan and personal lines of credit-normal for people with longer credit histories and can add slightly to their scores.
I hope this information helps you to review your credit score and make the changes if needed for a better credit score.
Credit is all around us and we are “judged” by our credit score. Having a healthly financial management will help you with budgets, credit, and ultimately control of your finances.
Laura Valentino Romero
