Basic of FICO Scoring

FICO scoring is used by lenders to figure out what your interest rate will be on loans you apply for. If you’re buying a house the types of mortgages available to you are based on your personal credit score.

The score is based on the system developed by Fair Isaac Company (FICO) and the interest you pay, as well as monthly payments that are based on your personal credit history and score as well.

The same is true when you get a car loan, as well as the premium on your car insurance or homeowners insurance. Your personal credit score can even affect your chances of getting new employment.

There are a lot of things that go into FICO scoring and we will group that into about five categories.

So that you will understand the basics of how FICO score is determined, the percentages below reflect how important each of the categories are in determining your personal credit score.

Payment history (35%)

Your payment history is the largest factor in determining FICO scoring. This includes the number of unpaid bills you have, any bills sent to collection, bankruptcies etc. The more recent the problem, the lower your score.

Debt (30%)

Your debt is determined by how much of a revolving line of credit you are currently using. If you have a CC with a credit limit of $100,000, the ideal place to be is a balance of $40,000. This sounds odd but $40,000 shows that you are using credit but that you are keeping it well within your means. Same goes for a car loan. Pay off 60% as fast as you can.

Length of your credit history (15%)

This one surprised me. Just length of history. How long have you had an open credit line. If you have a large credit limit and it has been paid as agreed over a long period of time, this will work the best. Close your old accounts if they are having a negative affect on you.

Recent inquiries (10%)

Any time you apply for something that requires credit, the other party with pull your credit score. Some are soft pulls and some are hard pulls meaning some won’t pull quite as much information and will have little to know affect. Others will. A soft pull would be checking your own personal score or report.

Credit Types (10%)

How much is still owed on current mortgage loans, credit cards and finance companies compared with the original loan amounts? Also it’s important not to open a number of new credit card accounts just to increase your available credit. It will have the opposite affect and lower your score.

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