Know Your Score ©
By Raymond E. Derucki, CPA
Applying for a loan or credit card? If you are, more than likely the financial institution will be checking your credit score, or commonly, called your FICO score. A credit report can be considered your detailed financial history; a FICO score is an objective summary of that information. A FICO score measures the likelihood of your repaying what you owe, and will determine what interest rate you will pay on your credit cards and mortgage loan.
Your FICO score is made up of five different factors.
- 35% Payment history - How have you paid your credit accounts in the past? Are you delinquent in your payments, any accounts in default, are your accounts paid on time?
- 30% Current amount of debt compared to your available credit - Your FICO score considers the number of balances outstanding and averages them to the relationship between total balance and total credit limit.
- 15% The length of your credit history - This phase deals with how long you have had an account, number of inquiries into new accounts, and new accounts opened. Inquiries are on your credit report each time you apply for credit. Historically those in financial trouble will try to increase credit lines or open new accounts, thus sending a red flag to lenders.
- 10% Relates to the types of credit used, is it a healthy mix? - FICO looks at the diversity of credit used, whether you use bankcard, department store cards, or installment loans.
- 10% How much new credit you've been seeking? - Inquiries, the number of times you have applied for credit in the recent past.
A personalized credit score analysis tells you what you're doing right and what you're doing wrong. FICO scores range from 350-850 points.
- 700 and higher are considered excellent scores. A person will be able to get a loan with the most favorable terms
- 620-699 scores indicate basically good credit, but also suggest to lenders to look for potential risk for a larger loan or higher credit limit.
- 620 and below, borrowers may not be able to get the best rates and terms, or they may have to put down a higher down payment.
There are various ways to improve your FICO score. Going forward you should consistently pay your bills on time, keep your overall debt at a reasonable level relative to your income, and actively and responsibly use several credit cards. Going backwards you should find out what's your credit file. Look for errors that may be on your report, make sure your information has not been merged with someone else if you had a change in name or location.
These small tips can help increase your credit score, and with a higher score, you can land a lower interest rate or qualify for a smaller down payment.
