Understanding FICO Credit Scores
Is Not a Mystery
Understanding FICO credit scores doesn't have to be a mystery. You have a legal right to know how they are computed.
FICO credit scores are shaped by five categories. Increase your knowledge and gain understanding by knowing which categories you may need to improve.
Homebuyerclassroom.com will help you understand credit scores by explaining how each category works to help you target your plan of action. It is important to understand that your scores affect home buying.
WHAT IS A FICO CREDIT SCORE?
This is a number that lenders use to estimate risk. Experience has shown them that borrowers with higher scores are less likely to default on a loan.
Home buyers who are seeking a mortgage find out early-on that their scores plays an important part in the home buying process and in determining the interest rate that a lender offers.
HOW ARE FICO CREDIT SCORES CALCULATED?
They are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies (Equifax, TransUnion and Experian) don't necessarily use the same scoring software, so don't be surprised if you discover that the credit scores they generate for you are different.
WHY ARE CREDIT SCORES SOMETIMES CALLED FICO SCORES?
The software used to calculate a great number of credit scores were created by Fair Isaac Corporation--FICO. FICO credit scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below.
The percentages below reflect the importance of each category. These 5 categories determine your FICO credit score:
- PAYMENT HISTORY - 35%
- AMOUNTS OWED - 30%
- LENGTH OF CREDIT HISTORY - 15%
- NEW CREDIT - 10%
- TYPES OF CREDIT USED - 10%
PAYMENT HISTORY - 35%
How you pay on specific types of accounts:
- Credit Cards: - (Visa, Discover, MasterCard and American Express)
- Retail Accounts: - (Wal-Mart, Target, Sears)
- Installment Loans: - (Consumer loans and/or Student loans)
- Finance Company Accounts: - (Automobile loans)
- Mortgage Loans
Presence of "unfavorable" public records on credit:
- Wage Attachments (Garnishments)
- Severity of delinquency (how long has it been past due)
- Amount past due on delinquent accounts or collection items
- Time since (how recent) is the past due item, adverse public records (if any) or collection items (if any)
- Number of past due items on file
- Number of accounts paid as agreed
AMOUNTS OWED – 30%
- Amount owing on accounts
- Amount owing on specific types of accounts
- Lack of a specific type of balance, in some cases
- Number of accounts with balances
- Proportion of credit lines used (proportion of balances to total)
- Credit limits on certain types of revolving accounts)
- Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
LENGTH OF CREDIT HISTORY – 15%
- Time since accounts opened
- Time since accounts opened, by specific type of account
- Time since account activity
NEW CREDIT – 10%
- Number of recently opened accounts, and proportion of accounts that are recently opened by type of account
- Number of recent credit inquiries
- Time since recent account opening(s) by type of account
- Time since credit inquiry(s)
- Re-establishment of positive credit history following past payment problems
TYPES OF CREDIT USED – 10%
Number of various types of accounts: credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.
- A score takes into consideration ALL these categories of information, not just one or two.
- No one piece of information or factor alone will determine your score.
- The importance of ANY factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score.
- It’s impossible to say exactly how important any single factor is in determining your score – even the levels of importance shown here are for the general population, and will be different for different credit profiles. What’s important is the mix of information, which varies from person to person, and for any one person over time.
Your FICO score only looks at information in your credit report.However, lenders look at many things when making a credit decision including:
- Your income
- How long you have worked at your present job
- Kind of credit you are requesting
Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.
It is extremely helpful to understand credit scores. As you've learned above, there are 5 categories that will help you improve your scores. It helps to know that you won't be penalized for every past mistake. It's also encouraging to know that you may be doing well in a few of the categories and now know which categories need improvement.
If you need to improve your credit scores, take action today. Write down a list of all your creditors, how much you owe, and how much you can send them each month. Make a vow that you will do the best you can to stick with improving your credit. Pray for strength, patiences and discipline to accomplish this task.
YOU CAN DO IT!
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