How Your Fico Score Is Determined
By Larry Lane for www.InvestorZoo.com
If you wish to borrow money, your credit score will determine the amount of credit you receive and at what interest rate you'll receive on your purchase. Your FICO score will have a direct effect in establishing new lines of credit through credit cards, as well as purchasing a car or new home. There are a number of employers who will request a credit check even before you become employed. Having a good credit score is imperative to being financially successful.
Your FICO score is ranked between 300 and 850. A credit score of 720 or higher demonstrates that have an excellent credit rating. A score of 650 or below means your credit score needs help. Your credit score information is provided to creditors on your credit report, which can be obtained from three main credit bureaus (Experian, Equifax or Trans Union).
High FICO scores can determine your monthly payments
Your FICO score will have a direct determination on the interest rate you qualify for on your home purchase. There may be as much as a 1-2% variation from those with good credit above 750 than those below 600. Depending on the amount of your loan, this could result in a homeowner paying $200 or more per month for the life of the loan.
FICO Scores are calculated from many criteria within your overall credit report. This data is grouped into five categories. The percentages below reflect how important each of the categories is in determining your FICO score.
1) Payment history (35%) Have you been on time paying your credit cards bills, retail accounts, loans, mortgage etc? Do you have any judgments, suits, liens, collection notices, late payments or bankruptcies in your past? If you have a delinquency, how many do you have and how long have they been past due? Do you have a number of accounts marked "paid as agreed"
2) Amount of debt outstanding (30%) What is your total dollar amount of outstanding revolving credit? What types of outstanding credit do you have? A high dollar balance outstanding with a credit card company will lower your credit score more than a home loan. How many credit card accounts do you have open? What portion of your credit line have you used with each card? What is your total outstanding vs. your overall income?
3) Length of Credit History (15%) How much time has it been since you've opened your credit accounts? The longer you've established your credit history, the higher score you'll generate.
4) Newly established credit (10%) Do you many recently opened accounts? What type of accounts have you opened? Do you have many recent credit inquiries? Have you re-established positive credit history following your past credit payment problems?
5) Types of Credit Used (10%) What types of credit has been opened opened (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.) A newly opened credit card may be viewed as negative. On the other hand a mortgage that has been paid on time for 2 years will add to your FICO score.
If you are seeking a loan, lenders look at many things when making a credit decision. In addition to your FICO score, your income from employment, how long you have worked at your present job and the type of credit line you are requesting are all determining factors.
Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO score.
If you have no credit history, you will have a difficult time purchasing a car or house. You should use one card heavily and have the other two as backups in case of emergency. Pay off any purchases you've made in full the next month. It goes without saying if you own a home and have a mortgage, stay current at all costs. Being late on a mortgage will severely damage your FICO score. Other loans affecting your credit score include car loans, school loans and department store credit cards.
Generally your utility company, cable and telephone company do not report late pays to credit agencies. Before dismissing your next electric bill, call and discuss payment plans. Each company is different and each has their own policies and procedures when it comes to reporting to credit agencies.
Larry Lane is the editor of www.InvestorZoo.com, a social network site specializing in personal finance
Questions and Answers
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