Most banks in the country use FICO scores to decide what and how much credit you can have and at what rate. Insurance companies use FICO scores to help rate your insurability. According to the FICO's testimony before a House Financial Services Committee, FICO scores are used in about 10 billion decisions worldwide each year.
Finance.Yahoo.com recently posted an excellent article on understanding your FICO score. The scoring system is a secret, but what makes up the score is open knowledge - there are 5 components, each weighted differently. "FICO scores give the most attention to how you have paid back lenders in the past and how much you are using of the credit available to you, as shown on your credit report. Those two factors contribute roughly two-thirds of a typical person's FICO score," says FICO spokesman Craig Watts.
Here are the key points of the Yahoo article, explaining the 5 elements.
1. Payment History - 35% of the total credit score
Repayment of past debt is the most important factor; past behavior can predict future behavior.
2. Debt Amounts - 30%
This is based on your total outstanding debt. Lines of credit, which you can use and then pay off, are more heavily weighted (for instance, credit cards). If you constantly max out your cards, this is not a good habit. Experts recommend that the amount owed should not exceed 30% of your credit limits. That 30% rule applies to each individual credit card as well as the overall level of debt.
3. Length of Credit History - 15%
This is based on the length of time each account has been opened and the length of time since that account's most recent use. So, it's impossible for a person just applying for his/her first credit use to have a perfect score. Think long-term behavior patterns (see #1 above). If you have been given credit, but haven't used it and may want to buy a house or car, for instance, start judiciously using your credit lines to establish a pattern of payments.
4 and 5. New Credit - 10%
Don't open too many credit lines at once, don't buy a car just before you apply for a mortgage, don't even apply for several credit cards at once - these actions could signify financial trouble or instability.
5. Credit Mix - 10%
Credit mix is vague, but if you have repaid a car loan, a credit card balance, and a mortgage it would mean you can handle many diverse types of credit, and should be a lower risk for lenders.
FICO spokesman Watts says, "So to get a good score you mostly need a credit history with no reported late payments, as well as low reported balances currently on any credit cards."
If you are concerned about qualifying for a mortgage to purchase a Mercer County NJ home, contact me for recommendations to qualified lenders in our area. They will be honest about your FICO score and how you can improve it. And don't wait until you are behind in your payments to look for help in meeting your mortgage - there are alternatives to foreclosure. Let's talk about your options.
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