Five Factors That Affect Your Credit Score
ALL ABOUT FICO
Five Factors That Affect Your Credit Score
Confused about FICO? You’re not alone. Many believe that it is an acronym for a technical concept. However, it is just an alternative tag for your credit score. A California-based company called Fair Isaac Corporation first developed FICO. FICO scores place a value on the types of accounts you hold and your credit history. The FICO scoring scale ranges from 300 to 850, with the majority of people in the United States falling over 600.
Your FICO credit score is determined by five factors. Let’s discuss them one by one.
1. Your payment history. This counts for a whooping 35%–the most of any other factor. Obviously, paying your bills on time is scored as great, while paying them late on a consistent basis is scored as bad. Being referred to a collection agency is worse, and declaring bankruptcy is the worst.
2. How much money you owe, as well as the amount of credit that is currently available to you. They will add up all of your outstanding loans, such as car loans, mortgages, and even school loans and then compare that number to your annual salary. Then, they will add up the amount of credit available to you, and compare it to what you’re currently using. People that use all of their available credit (for example, if all of your credit cards are maxed out) will rate lower than those who don’t. These factors are worth 30%.
3. Length of your credit history. The longer you have had credit, the higher the FICO score will be for this section. In addition, if you’ve had a long-standing credit agreement with one party, you’ll do even better on this aspect of the scoring process. This third factor counts as 15% toward you final score.
4. Type of credit mix that you have. For example, do you have only unsecured credit loans (high risk), or do you also have some solid secured loans such as mortgages and automobile loans? Consumers with a mix of credit have higher FICO scores. This fourth factor counts only 10%.
5. Amount of new applications that you fill out. If you have filled out a lot recently, this will hurt your score because it puts lenders “on alert” that something may be wrong. This part of the score is worth 10%.
Lenders usually look at employment, income, length at current residence, and marital status, but these do not affect your FICO score. The prospect of having a bad FICO score should scare anyone who plans on borrowing money for the future. If your FICO score is low, this could mean high interest rates, extra mortgage insurance when buying a home, or in some cases denial of the loan.
If you’re planning to get a big loan, you could ask for your credit report 6 months early to give you ample time to check it for discrepancies. If inaccuracies are found, contact the Credit Reporting Agency in writing; they have 30 days to investigate it, and then correct it if they find truth to your claims. If inaccuracies exist, the CRA is required by law to supply you with a revised credit report. Knowing your rights would go a long way in securing the loan that you need.
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