Your credit score is one of the key factors on credit applications such as a mortgage application, car loan or new credit card. The most widely used risk indicator is called the FICO score. The FICO score measures your creditworthiness as a borrower.
Scores typically range from 300 to 850 with higher numbers giving you a more favorable grading. Each financial institution applies its own acceptance rules but scores greater than 650 are generally positively received. Scores higher than this may qualify for better lending terms.
Many lenders rely on multiple credit bureaus to calculate FICO Scores. Since each bureau extracts different data about you, your scores will vary between bureaus.
Although the fine detail behind scoring criteria has remained a guarded secret, FICO has indicated that each score is computed with weightings from each of the following five categories:
The Amount of Debt you currently owe is allocated 30 percent of your FICO score. Best practice suggests that housing debt should equate to no more than 28 percent of your gross monthly income, while other loans (cars, tuition, credit cards, etc) should add only an additional 8 percent.
The Payments History generally accounts for 35 percent of the overall credit score. Missing individual payments from time to time only results in small penalties. Consistency is critical. If a pattern of late payment is established, your score will go down quickly. Please remember, late payments will generally stay on your credit report for 7 years.
Length of Your Credit History
This accounts for 15 percent of the calculation and considers how old your oldest accounts are, how new your newest ones are and how long you’ve had certain kinds of accounts. In general, having kept open, and used, the same accounts for a long time can be a positive factor.
Types of Credit
The FICO scoring formula considers the Types of Credit you rely on, both the number and variety of accounts (mortgage, car loan, etc). Having experience with multiple types of accounts evidence responsible practices and will positively influence your score. This is allocated 10% weighting when determining your FICO score.
Finally, New Credit also influences your FICO score. There isn’t an easy reckoner to apply to this criteria but this will look at how many new accounts you have by type of account. A pattern of successful new accounts being opened is positive but overuse (too many new account requests or credit checks in general) can see your score being negatively impacted. Like Types of Credit, this is also allocated 10% weighting when determining your FICO score.
If you want to find out more about your current credit score position, the major credit bureaus are required by law to give you a copy of your credit report each year for free. You can get those reports from https://annualcreditreport.com. Also, many banks and credit card providers are now providing free credit monitoring services. If you have them, use them.
Do you know your current credit score? How is it impacting your life financially and can we help?