Tips on improving or maintaining your credit scores

Real Estate Agent

This is as clear and concise a breakdown of credit scores as you'll ever read.  I thought it was well worth sharing.

Original content by Jay White

I see credit everyday and I hear stories daily how someone was given very bad advise by so called "experts" on how to build or rebuild their credit. I am one that does not pretend to be something I am not....and I am not a credit expert, I am an expert at determing if someone can actually qualify for a mortgage loan based on credit but it stops there for me.

I found the article below and thought it could be helpful to some.


Payment history and total debt are important parts of the mystery mix -- but not the only factors.


In the land of credit scores, the FICO score is king.

The bulk of banks in the United States (FICO's website claims 90 of the 100 "largest financial institutions") use FICO scores to decide whether to offer credit to potential borrowers and at what interest rates. FICO has a major global presence as well: According to the company's testimony before a House Financial Services panel, FICO scores are used in about 10 billion decisions worldwide each year.

So how does FICO, or Fair Isaac, come up with its widely used score?

Although the inner workings of the FICO scoring system are a closely guarded secret, the company is open about the general components of a FICO credit score. Using the information in a borrower's credit report, FICO breaks that information into five categories. Each of those five components is 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," FICO spokesman Craig Watts says. "Those two factors contribute roughly two-thirds of a typical person's FICO score

The 5 elements of a FICO score

1. Payment history: 35% of a FICO score is based on a borrower's payment history, making the repayment of past debt the most important factor in calculating a credit score. According to FICO, past long-term behavior is used to forecast future long-term behavior.

FICO keeps an eye on both revolving loans, like credit cards, and installment loans, such as mortgages or student loans. Although the weight of each loan varies among individuals, FICO indicates that defaulting on a larger installment loan, such as a mortgage, will damage a credit score more severely than defaulting on a credit card payment or another smaller revolving loan. One of the best ways for borrowers to improve their credit scores is by making consistent, timely payments.

2. Amount of debt: 30% of a FICO score is based on a borrower's total outstanding debt. Revolving lines of credit, which allow a consumer to borrow as much or as little as desired up to a limit, are more heavily weighted. This is opposed to installment loans in which a set amount -- say, a $20,000 loan for a car -- is determined at the outset.

Because FICO views borrowers who habitually max out credit cards, or even get very close to their credit limits, as people who cannot handle debt responsibly, a borrower should maintain low credit card balances. Experts recommend that the amount owed should not exceed 30% of the individual's credit limits. That 30% rule of thumb applies to each individual credit card as well as the overall level of debt.

The final components of a FICO credit score get less weight in the score's calculation. "The remaining one-third of your score is determined by how long you have managed credit, to what degree you have pursued new credit recently and the variety of credit types you have successfully handled," Watts says.

3. Length of credit history: 15% of a FICO score is based on the length of time each account has been open and the length of time since the account's most recent action. As a result, it is impossible for a person who is new to credit to have a perfect credit score. A longer credit history provides more information and offers a better picture of long-term financial behavior. Therefore, to improve their credit scores, individuals without histories should begin using credit, and those with credit should maintain long-standing accounts.

4 and 5. New lines of credit and a credit mix: Each makes up 10% of a FICO score. Borrowers, even those new to credit, should avoid opening too many credit lines at the same time, because such behavior could suggest that they are in financial trouble and need significant access to credit. FICO suggests that borrowers take on additional credit only when they must have it or when it makes sense financially. Credit mix, meanwhile, is a somewhat vague category. But experts say repaying a variety of debt -- such as credit cards, student loans and a mortgage -- indicates a borrower can handle all sorts of credit. According to FICO, historical data indicate that borrowers with a good mix of revolving credit and installment loans generally represent less risk for lenders. 

Knowing the various weights given to components of a FICO credit score give borrowers a better idea where to focus their attention. "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," Watts says.

This article was reported by Jeremy M. Simon for

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Comments (1)

Elite Home Sales Team
Elite Home Sales Team OC - Corona del Mar, CA
A Tenacious and Skilled Real Estate Team

Any blog that helps the client know how to protect their credit is a necessity

Jun 27, 2010 06:44 PM