FICO Score

What is a FICO Score?


The FICO score is a key tool used by many lenders to assess the creditworthiness of a borrower; it conducts a probability analysis on a borrowers credit report assessing the ability of an individual to repay his/her debts.  The FICO score is based off of the credit reports from the three major credit reporting agencies; Experian, Transunion, and Equifax.

The FICO score is used in making decisions about the size of a credit line, the interest rate you receive, the size of a down payment required from you, and even the types of loan products you are eligible for. 

A persons FICO score will range between 300 and 850.  Generally, it is said that a score above 700 will yield the best terms and conditions for a loan and indicates that you are a borrower with strong financial health.  FICO scores that fall below 620 are usually considered red flags for lenders and will hike up the rate and tighten other qualifications required to receive a loan. 


How is the FICO Score Calculated?


There are 5 key factors assessed to derive the FICO score.  As we suggested above, this score is derived through the use of all three major credit bureau reports.  The following items are scrutinized:

1)  Payment History Represents 35% of this score.  The number of late payments, bankrupcies, charge-offs, and other negative credit events will negatively affect this score.  Making payments which are larger than the required minimums will your score, as will consistently making timely payments

2)  Leverage represents approximately 30% of your FICO score.  Leverage refers to the amount of credit that you use in relation to your available credit line.  The lower these percentages are, the better off your credit score is.  A borrower who uses a high percent of their available credit line is viewed as a risky borrower.  The debt to income ratio is the most common leverage ratio used by lenders to assess a borrowers leverage.

3)  Credit History - This one is pretty straight forward and represents 15% of your score.  The longer you have your accounts open and in good standing, the better you will appear in the eyes of the credit reporting agencies.  This does not mean you cannot have a high score if you are 25 years old.  Your score will only continue higher as you continue to make timely payments and properly manage your debt accounts.

4)  Newly Established Credit represents about 10% of your FICO score.  Applying for many different types of loans within a short period of time will negatively impact your score; however, if you are looking to buy a house and get your credit run with 3 different lenders, the credit reporting agencies will not count this against you as long as it is within a short period of time, such as 30 days. 

5)  Miscellaneous factors account for about another 10% of your FICO score.  Over time, having a variety of different types of loans, such as credit cards, mortgages, auto loans, and student loans in good standing will help your score over time as it indicates you are able to handle your finances well. 

How can I Fix My Poor FICO score?


Pay your bills on time and do not borrow too much!  With that being said, we all have problems sometimes and the unthinkable happens at times which prevents us from paying our bills, sending a credit score down drastically.  I have heard rave reviews about Lexington Law which helps clients improve their credit scores through a legal process which will not be discussed here.  Visit their website for more information; their fees are very reasonable for what they offer.

Bottom Line:
  A poor FICO score can be a silent killer as it can increase your interest rates on extremely large items such as a house, car, and other big ticket items.  Over the years, the interest alone can be dramatic.  Stay current with all your bills, no excuses, if you want to be prime borrowing candidate.  You should always keep track of your credit score or even sign up for a service that will monitor it for you to make sure there is no fraudulent activity appearing on your report.  If not handled immediately, it can take years in some cases to fix this.

If you are planning on buying a house or getting a new loan in the near future, be careful about allowing companies to run your credit, especially if you are on the borderline of your lenders credit score requirements.  A new run on your credit will most certainly hit it a couple of points and that could cost you significant amounts of money in the long run.
Tim Ord
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