Why Your FICO Score Matters
Your credit score can have a profound effect on your financial well-being. Having a credit score that is too low can keep you from getting new credit, starting a business or buying a home. Employers, landlords and insurance companies have started using credit scores to determine how reliable an applicant is likely to be.
When a bank or other creditor decides what loans are available to you, just a few points’ difference in your credit score can change what loans you qualify and how much your mortgage interest will be. This small difference can add up fast, costing you thousands of dollars over the life of your loans.
How Credit Scores Are Calculated
If credit score calculations seem mysterious to you, you are not alone. The exact way to calculate credit score is a closely-guarded secret, but Fair Isaac, creator of the FICO score, has released some of the facts that are used to do the math. FICO evaluates the information on your credit report and assigns a credit score between 300 and 850 based on the following five criteria.
35% Payment History: Your history of paying your bills on time. This includes:
- Number of collection accounts
- Late payments
- Number of accounts in good standing
- 70% of your score is based on your credit history over the previous 2 years.
30% Amount owed: on your revolving and installment loans, including your credit utilization ratios on your credit cards.
15% Length of Credit History: The longer you have had credit the more established you appear. Keeping your accounts open as long as possible keeps your average age of accounts high, which will have a positive effect on your score.
10% Types of Credit Accounts: Having a good mix of different types of credit (i.e. Revolving, Installment and mortgage loans)
10% New Credit: New accounts and Hard inquiries
- Paying off collection accounts will improve your credit score. Paid or unpaid a collection will always affect your credit. Whether it has a zero balance, or a $1,000 balance it will still be a collection account that stays on your report for 7 years.
- Keep a balance of 30% no less on credit cards or your score will decrease. The lower your balance the lower your credit utilization ratio will be) This means your score will be higher the lower you keep your card balances. Try to pay them off each month or keep the balances as low as possible.
- Checking your credit is going to make your score drop. Checking your score online at websites like Credit Karma or Credit Sesame will not harm your score. Only pulls from lenders count as inquires, and inquires make up 10% of your credit score.
Are you considering buying a home but wonder if you can achieve that goal with your current credit score? Simply fill out our convenient form to get a free no-hassle consultation from lenders within our network to compare loan offers available to you.
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