Okay, blog readers of the world, here’s the first of several lessons on the infamous Credit Score, in language you can understand.
What is FICO? Literally, it stands for Fair Isaac Corporation – named after Mr. Fair and Mr. Isaac, who developed a ‘score’ or measure of credit risk and sold it to the banking industry. These guys are probably so rich they don’t need to be concerned about their own FICO scores … but you do.
A FICO score is between 300 and 850, with the median score of 723. The FICO score provides banks with a snapshot of how likely you are to pay your debts. As you have discovered if you have applied for any credit, banks may deny the loan, charge you a higher interest rate, demand more collateral, and/or require extensive income and asset verification if your score is low.
The score itself is a statistical analysis of your credit report information, typically from the three major credit bureaus – Equifax, TransUnion, and Experian. Here are the components of your FICO score:
35% — Payment History. Pay your bills on time! I have a friend who never received a $24 bill from a department store, because she moved and didn’t notify her creditors. That $24 past due bill ballooned into a $285 collection from a collection agency, and she has been denied a mortgage loan because of it!
30% — Credit Utilization. The ratio of credit card debt to your credit limits. Pay off your debt but don’t close your credit cards. If you have an abundance of credit cards though, it is best to close the ones you never use and get it down to a reasonable level of just a few credit cards with larger credit limits.
15% — Length of Credit History – As your credit history ages, and pay your bills on time, it can have a positive impact on your FICO score.
10% — Types of Credit Used – Installment (car loan for instance, revolving (credit cards), and consumer finance (financing from a furniture store for example). You will benefit by having a history of managing different types of credit.
10% -- Recent search for credit and/or amount of credit obtained recently. Don't go crazy opening new credit cards or applying for financing for that new carpet or couch! Don't fall for the "You can get 10% off your purchase today if you apply for a credit card". Multiple credit inquiries in a short period of time will hurt your score!
The FICO company sells FICO scores directly to consumers at www.myFICO.com. Check it out! There are other factors that lenders consider when granting credit -- more on that later! If you would like more information on applying for credit for your new home, contact me at dgreco@kw.com!
