The FICO score has always seemed a bit mysterious but it is an important ingredient in obtaining a home loan. The FICO score uses your credit information and identifies how reliable you would be in repaying borrowed money or if you are credit worthy. A FICO score can vary, depending on the specifics used by the lender and the credit agency.
The Fair Isaac Company, whose shortened name is FICO, relies on percentages from the following five
factors of your credit history to determine your score.
- Payment history, 35% of score: Regular, on time payments will keep your score high. The score also notes the frequency that your payments have been late.
- Current total debt, 30% of score: This part of the formula looks at how much you owe and compares that against your credit limit. The ideal amount of credit used should be 25% or less of your available credit. Credit limits should not be maxed out.
- Length of credit history, 15% of score: For creditors, time equals stability. So if you have a good long-term history with a credit card, keep it open, even if you’re not using it. An open and active credit account demonstrates that you are dependable.
- Requests for new credit, 10% of score: Credit inquiries are tracked by the credit bureaus, and classified into two types, “hard” and “soft” inquires. A hard inquiry is when you actually apply for credit and the potential lender pulls your report. That will actually lower your score if you are seeking credit. If you’re not actually asking someone to consider you for a loan, that’s called a “soft inquiry.” Some examples include a current creditor who wants to look at your report; you look at your own credit history or a potential creditor wants review your credit. Soft inquiries don’t affect your score because they do not indicate you’re out shopping for more debt. To keep your score high, apply for credit only when you need it. If you’re getting ready to make a big purchase, like a home or car, hold off on applying for other types of credit.
- Types of credit, 10% of score: The main factor to analyze is whether your financial history shows a mix of different kinds of loans; for example, mortgages, revolving loans, student loans and installment loans. Different types of credit show that you can balance all these choices, which creates a good recipe for a high FICO score.
Review your credit report
If you’re thinking about making a big buy where a few percent in interest can mean thousands in (or out) of your pocket, pull your credit history at least three to six months before you start shopping. If you find an error, you’ve got plenty of time to get it cleared up before a potential lender sees your reports.
The Consumer Protection Bureau allows everyone to receive a free credit report once a year. Visit
annualcreditreport.com to obtain a copy of your report.
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