When youre applying for credit whether its a credit card, a car loan, a personal loan or a mortgage lenders will want to know your FICO score. FICO is an acronym that stands for Fair Isaac Credit Organization and has become the main measuring stick mortgage companies use to predict whether or not someone is a good credit risk. FICO scores range from 300 to 850 and, unlike in the game of golf, a low score is not good. Here are some general rules regarding FICO scores. If your score is below 500, mortgage companies consider you a poor credit risk, and you will not be approved for a mortgage. On the other hand, if your score is 700 or above . . . well, just tell us how much money you want and well drop it off on your door step the next day! Just kidding, but you get the picture. A score between 500 and 619 tends to put you in what we term a sub-prime category, which means you will pay a higher interest rate if your loan is approved. Scores between 620 and 699 are weighed along with a variety of other factors in determining whether your loan will be approved and what interest rate you will receive. Again, the higher the score, the better. If Ive got you wondering, Whats my FICO score?, you can do one of two things. You can go to www.annualfreecreditreport.com and retrieve a free copy of your credit report from all three Credit Reporting Agencies: TransUnion, Equifax, and Experion. I always sugest paying to get the credit scores so you have a rough ideas of where you stand; unfortunately with the free service, they will not provide you with credit scores; thank the government for that. Once you receive it, I will review it with you to ensure everything is as it should be and recommend changes that could increase your score. The other way to get your score is to go to www.myfico.com and purchase one of the services they offer, which range in price from $14.95 for one bureau report to $44.85 for all three. You should be aware that some businesses will sell or give you credit scores that are not FICO scores and may also give you credit management advice that does not apply to FICO scores and could actually hurt your credit standing with lenders. How Does FICO Determine Your Score? In taking a closer look, we get an understanding with this breakdown from the experts who understand credit scoring and how various choices you make impact your score..... 35% of your score is derived from payment history. Pay your bills on time and avoid judgments, collections and tax liens and youll be OK. The longer you pay your bills on time, the less your credit score will be affected. If you are late, however, the score takes into consideration how late (i.e., 30, 60, 90 days past the due date), how much was owed, how recently the late pay(s) occurred and how many there were. A 90-day late payment is not as risky as a 30-day late payment, in and of itself. Recency and frequency count too. A 30-day late payment made just one month ago will affect your score more than a 90-day late payment from five years ago. 30% of your score is derived from balances carried on accounts. The lower your balances the better. Revolving credit card debt is the most significant factor in this area. Scores are significantly reduced if your revolving credit balance is close to or at your credit limit. The scoring model considers you to be maxed out when this happens. One of the easiest ways to increase you FICO score, if you find yourself maxed out, is to ask the credit card company to increase your credit limit, and if possible, to do it without pulling your credit. Pulling your credit will create a credit inquiry, which we will talk about later. If at all possible, keep your balances below 45% of your available credit limit. Be aware that some credit card companies, Capitol One for example, withhold or fail to report your credit limit. When this happens, the scoring system typically substitutes your highest reported balance on the card for your missing limit. That in turn will often depress your score because it will appear you are maxed out when in fact you may be nowhere near your credit limit. 15% of your score is derived from the average length of time you have had credit. The longer the amount of time, the better. So if at all possible, never close a credit card account . . . just stop using it if you no longer have a need for it. Being added as an authorized user to someones older credit card account will help a lot also. The card should be at least seven years old to make a decent impact in this area. 10% of the score is derived from the mixture of credit you have on your credit report. To maximize your score in this area, FICO would ideally like to see on your record a mortgage, a car loan and a few credit cards. The magic number of credit cards to have is three, but it is never a good idea to close credit cards to get down to that number because closing cards does more damage than the benefit received by having fewer cards. And finally, 10% of your score is derived from the number of times you apply for credit because each time you do so, you generate a credit inquiry , which, as stated, can work against you. The number of your accounts that are new is also an important factor. Inquiries remain on your credit report for two years, although FICO scores only consider inquiries from the last 12 months. Important to note is that all mortgage inquiries made within a 45-day period are treated as one credit inquiry no matter how many times your credit is pulled for that purpose. |
