Basic of FICO Scoring
FICO scoring is a system that lenders and underwriters use to determine what your interest rate on a loan is going to be. If you buy a house or car, the mortgage or the loan is determined by you credit report and your FICO score.
That score is based on the FICO model and the interest you pay, as well as your monthly payment, is based on what your personal credit score number is.
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.
The different methods used to determine your FICO score can be divided into about five different categories.
We will include in every category a certain percentage to give you an idea of the importance each area plays in determining your personal credit score.
Payment history (35%)
Your payment of history is the biggest indicator for a lender whether or not they should lend you money. Thus , it is also the biggest factor in creating your FICO score. This means that how many of your bills are unpaid or late has a the biggest affect on your credit. The more recent the late payment is, the worse the score. Bankruptcies will take it down even farther and stay with you for over seven years.
Outstanding Debts (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.
Type of Credit (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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Tags: bad credit, credit repair, fico, fico scoring
