Understanding the FICO Score
Not understanding the five elements that make up your FICO score could have a tremendous negative effect on getting approved for credit. For example, if you are 30 days late within the first two years of having an account, this could bring your credit score down by 30 points. In return, you could get denied for a home loan based on that single 30-days-late indication. In today’s society, your credit score is used whenever you apply for credit, so it’s important that you understand how to raise it and maintain it. Monitoring the five areas of your credit score will let you know which areas need improvement. Once you achieve the score you are aiming for, you must maintain it through education and discipline.
What is a FICO score?
A FICO score is a three-digit number that is built from the information contained in your credit report. It summarizes information like your negative accounts, payment history, the amount of debt you carry, the length of your credit history, the amount of new credit you applied for, and the type of trade lines you have in your report.
How do I start a score?
To get a score, you need one trade line on your file for six months, and that account must have been updated in the past six months. You can accomplish this by simply opening up a secured credit card account with one of the banks listed in Chapter 8.
What is a good score?
Lenders say that with a 720-760 score, you get the best prime rates. With a 620, you get the sub-prime, risk-ier rates.
750-850 - Excellent.660-749 – Good.620-659 – Fair.350-619 – Poor.
Where can I get my score?
You can get your score from various online companies, but it won’t be your true FICO score because the organizations are not pulling their scores from the FICO model. These scores will only give you a close in-dictation of what your numbers are. Only order your credit score from MyFICO.com because that’s what most lenders use when making a decision to grant you credit. When looking at your score, pay attention to the middle number because these are the numbers lenders focus on. For example, say your score from Experian is 650, Equifax is 700, and TransUnion is 742. The lender will look at the 700 score to make their lending decision. This is called the middle score. You can also pull your score from all three credit bureaus, though they use their own model to calculate your credit score.
How is my score calculated?
It’s calculated by your payment history, the amount you owe, the length of your credit, what new credit you have applied for, and the type of trade lines you have.
Your paying habits are 35 % of your credit score. If your late payments are recent, it will lower your score more than if you were behind in the past. In addition, a 90-day-late indication will severely damage your score over a 30-day mark. In addition, public records like tax liens, judgments, and bankruptcies fall into the same category and could take your score down even further, so make sure you are current with the creditors and always pay your bills on time.
Amount you owe
The balance on your accounts is 30% of your available credit score. So, using all of your credit will worry lenders and hurt your score. The lower your balance is, the better your score. You want to keep your balances around 7% to 10% for each account. Also, if you make a big purchase and want to maintain the 10% balance level, make sure you pay off your purchased item before your bill cycles. If you pay after the cycle, the lender will report your high balance.
Length of credit
The amount of time you’ve had your credit makes up 15% of your credit score. The age on your trade lines is very important to lenders because it shows that you have paid your bills on time. Reliability and longevity are good traits for additional credit, so don’t close old accounts. If you have too many accounts and you want to close a few, close the accounts that are new with low limits.
New credit makes up 10% of your score. The FICO model looks at how many accounts you’ve applied for lately as well as any fresh accounts you have opened. The model looks at time passed since you requested new credit, and the amount of time since you opened another account. If you open too many accounts in a short period of time, you will look desperate to the lenders, and they don’t like loaning money to needy customers. So, try not to apply for more than two new accounts per year.
Type of credit you use
This section makes up 10% of your score. FICO wants to see a healthy mix of trade lines like a couple of major bank cards, retail store cards, and installment loans like a car, personal, or mortgage loan.