What Makes Up A Credit Score
Many of us know that the Credit Score is a mysterious 3 digit number that determines if you can get a loan for a home, a car, or get the nod for that a Macy’s card that will give you 15% off today’s purchase. It’s one of the most important criteria that a lending institution uses to decide if you can be trusted with a loan, and if so - how much that loan will cost you. Just going to a post abit about what exactly makes up the score, how they score you and what you can do to improve your score. A person with a FICO score of 850 may have a monthly payment $1100 on a 180k loan versus a monthly payment of $2100 on the same loan if their score was 500. That’s over a QUARTER MILLION in additional interest or 500,000 Jack in the Box tacos you would have to forgo over the course of a 30 year loan.
FICO - Fair Issac Corporation
When lenders tell you your score, it is often referred to as your “FICO”. The FICO is the most commonly used scoring system to see how risky it is to lend you money. FICO is an acronym for the Fair Issac Corporation which developed it. All three of the major Credit Reporting Agencies: Equifax, Experian and TransUnion all use a variation of this system.
Your score can range from 300 which is the person that put the “un” in untrustworthy to 900 who puts the “solid” in solid gold. The closer your score is to 850, the more banks will battle each other for the right to lend you money.
Your score is broken down as follows:
- 35 percent of your score is based on payment history. Are you reliable about opening up your bills and getting the checks in the mail ontime? Or do creditors have to constantly harass you to settle up? Anything like a previous foreclosure or bankruptcy will hurt here. More recent activities will matter more than old events. I would suggest going with electronic bill pay to make it easier to stay on top of your bills.
- 30 percent of your score is based on existing debt. Anything you owe on your home, your car, your credit card all matters. In addition to hurting your your FICO, high debt to equity ratios will give lenders pause on if they can lend you more money. See loan approval process
- 15 percent of your score is based on credit history. The more information they have on your credit history, the better predictions they can make regarding your reliability.
- 10 percent is based on type of credit used. Do you have short term debts, revolving debts, longterm debt, etc.
- 10 percent of your score is based on how many checks have been made on you. It can be suspicious if you are trying to secure a lot of credit in a short amount of time. Most people take some hit to their score in this category as they are shopping for mortgages but there are a few things you can do to limit this impact.