For this week's installment of Credit Tip Tuesday I thought I'd go back to the most basic of all questions, what is a FICO score? FICO is an algorithm developed by the Fair Isaac Corporation that analyzes your credit profile and produces a score based on a number of factors. Some of these factors include:
1. Types of Credit Used
2. Payment History/Late Payments
3. Age of accounts
4. Public Records
5. Balance to Limit Ratios
6. Collection Accounts
7. Pursuit of New Credit (Inquiries)
FICO does not currently take into consideration certain types of monthly payments such as rent, utilities, cell phone bills, although not paying them can lead to collection accounts negatively affecting your score. FICO scores can range from 300-850.
There are three major credit reporting agencies that utilize FICO; Experian, Equifax, and TransUnion. In the case of mortgages your qualifying FICO score is the middle of the three scores, not the average. In the below example this borrower's mid score would be 769:
Transunion 770
Equifax 769
Experian 680
Could there be such a huge disparity between the three agencies? The answer is yes. Some creditors don't report your history to all three agencies and many collectors only report to one. If a consumer had a collection account that only reported to Experian than it stands to reason that their Experian score would be much lower.
Often we are asked questions such as, "how many points will my credit score go down/up if I do XYZ?" The answer to that question is "it depends". I know that's everybody's favorite answer but there is a reason for it. Like I said earlier FICO scores are based on an algorithm. A late payment will have a different impact on you based on your overall credit profile than it would on somebody else with a totally different credit profile. There is no hard and fast point system" that says a credit inquiry is 5 negative points, an on time payment is 10 positive points, etc.
So what are some best practices to keep your credit score as high as possible? I'm glad you asked:
1. Pay your bills on time
2. Keep your credit card balances below 50% of the spending limit
3. Don't open too many new accounts
4. Don't let bills go to collections
5. Have a good mix of revolving and installment debt
6. Live within or better yet, below your means
Michael Tizzano
Loan Officer: Amerifirst Financial, Inc
1550 E. McKellips Rd #117
Mesa, AZ 85203
Office: 480-344-1967
Cell: 480-512-9052
Comments(5)