You Don’t Have to be a Financial Whiz to Understand Your FICO Score!
The most common credit score used by mortgage lenders in the United States is the FICO score. This score helps lenders determine a loan applicants creditworthiness and has a direct bearing on the terms that the lender is likely to offer any given individual. Generally speaking, the higher the FICO score, the lower the risk. This means that people with higher scores usually receive more favorable loan terms.
The precise formulas and methods used to calculate a credit score are closely guarded proprietary secrets. Nevertheless, the FICO corporation, the leading developer of credit scoring processes, has made the general outlines of their process available to the public. Knowing this can help the consumer understand what factors are used to formulate their credit score and what items to correct or appeal to get a higher FICO score. The following list of factors provide a general outline of what the FICO looks at and what weight it assigns to these factors:
The most influential factor is ones payment history. This looks at the individuals history of making payments on credit accounts, and lowers the score for each late or missed payment. This factor is weighted at some 35% of ones FICO score.
The second most important factor is the ratio of credit used against the amount of credit available. The best scores come from having a large amount of credit available while only using a small fraction of it. This score is increased by paying down outstanding loans, but without closing the loan. Closing revolving accounts, such as credit cards, lowers this score; while keeping them open but paid down increases it. This factor is weighted at some 30% of a persons credit score.
Duration of Credit History: The FICO score is a tool to give creditors insight into how a person will behave if credit is extended. The longer the credit history the more information is available to indicate how a person will handle future loans. The longer your credit history the higher this part of your score will be. At 15%, it ranks third in weight for the scoring process.
Two additional factors weigh in at about 10% a piece. These are the number of types of credit one has successfully managed and the number of recent credit inquiries. The FICO score generally considers the successful use of diverse types of credit as a positive factor. FICO also looks at the number of recent queries into a persons credit and considers this indicative of the persons current financial situation. The more queries made ” meaning the more credit the person has applied for recently ” the lower the score.
This outline should go a long way towards helping the consumer understand how their credit score, and specifically their FICO score, is calculated; it should empower consumers to act wisely, increase their FICO scores, and be rewarded with better terms for their loans.
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