You Don’t Have to be a Financial Whiz to Understand Your FICO Score!
In the United States mortgage lenders rely heavily on an applicants FICO score in making lending decisions. The score is a reflection of the applicants ability and willingness to repay loans; it also impacts the terms of any loan offered and even whether or not the loan is offered at all. A higher FICO score generally translates into a lower risk loan for a creditor; higher scores usually mean better loan terms and rates.
How a FICO score is calculated is a proprietary industry secret held in the strictest confidence. However, the FICO corporation has made available a general outline of what information they use in the credit scoring process. Knowing what makes up a FICO score empowers consumers to raise their scores by handling credit appropriately. Here is a list of the factors used in calculating a FICO score, including how important each kind of information is to the formula:
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.
Credit Used and Available Credit: This is an important ratio to a lender and it makes up 30% of your FICO score. Having plenty of available credit will raise your score. Also, paying down loans regularly but not closing them, and paying down your open revolving credit cards will increase the score. However, closing revolving credit accounts will lower the score.
The length of a persons credit history is the third most important factor, weighted at about 15% of ones FICO score. Since the FICO score is meant to help the lender predict how the consumer will behave with the loan, the more of a credit history the borrower has, the more likely it is that past behavior will be indicative of future behavior. Therefore, the longer ones credit history is, the higher the score will be.
Types of Credit and Recent Credit Inquiries: These two factors make up the last 20% of your score, or 10% each. There are different kinds of credit available to consumers and FICO looks at how an individual has handled these. If there are different kinds of credit that has been handled successfully then it raises the score. The number of recent credit inquiries can give a picture of a persons current financial situation. If there are a lot of inquiries into someones credit the score will go down.
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.
