CREDIT & FICA SCORES (Click Here)
If you have ever applied for credit for a home loan or a car loan, then you’ve probably seen your credit report. These lenders consider you credit worthy or having an unworthy credit report based on a certain criteria. These lenders base their decision on many factors, including your Credit Score. One of my clients have a FICO Score of 832 (the last lender they used said it was the highest score, he has ever seen). It meant they bought a home without verifiable jobs or income. You can see the importance of your Credit Score.
Improving Your FICO Score
There are things you can do to develop a solid credit history and improve your FICO score.
- Pay your bills consistently on time - recent late payments are more harmful to your score than older late payments.
- Check your credit report and remove any errors - inaccurate information on your credit report can lower your score.
- Keep your debt reasonable - as a general rule, your account balances should be below 75% of your available credit.
- Maintain only a reasonable amount of unused credit - having ready access too much money (instant debt) can make you an unsatisfactory credit risk.
- Avoid too many inquiries - inquiries can be interpreted as a sign that you are seeking credit and could overextend yourself or may be in financial difficulty.
WHAT’S IN A SCORING MODEL?
- Recent payment history
- The amount of credit you have access to and are using
- How long a credit history you have
- Whether you’ve been shopping for credit
- Notification of collection and public record items such as liens and bankruptcies
WHAT’S NOT?
By law, lenders and scoring models are prohibited from considering factors such as:
- Your race - Your religion - Your gender
- Whether you’re married, single or divorced
- Where you were born
Although there a dozens of scoring models being employed (and more on the way) the most well-known company in the scoring business is Fair, Isaac and Company, known as FICO: fairisaac.com (you can get your FICO score here).
A numerical score is then developed, typically ranging from 300 to 900, with the low end of the scale indicating a poor credit risk. This can tell a lender whether or not he’ll lend to you.
What’s in your score?
According to FICO, the breakdown of your score is as follows:
- 35% of the score is determined by payment histories on your credit accounts, with recent history weighted a bit more heavily than the distant past;
- 30% is based upon the amount of debt you have outstanding with all creditors;
- 15% is produced on the basis of how long you’ve been a credit user (a longer history is better if you’ve always made timely payments);
- 10% is comprised of very recent history, and whether or not you’ve been actively seeking (and getting) loans or credit lines in the past few months;
- 10% is calculated from the mix of credit you hold, including installment loans (like car loans), leases, mortgages, credit cards, etc.