How Your FICO Score is Calculated

How your FICO score is calculatedCredit scores give lenders a fast, objective measurement of your credit risk. Before the use of scoring, the credit granting process could be slow, inconsistent and unfairly biased.

Types of Credit in Use: 10%–Considers the number of credit accounts and the mix of credit types: credit cards, installment loans, mortgages. This is most important if you don’t have a very long credit history.

Payment History: 35%–Takes into account the many different types of payments, including mortgages, major credit cards, department store credit cards, car loans, other installment loans such as for furniture, etc., Next, information from public records, such as bankruptcies, liens, lawsuits, foreclosures, judgments, and wage garnishments. Also, details of any missed or late payments, such as the amount, how long ago it occurred, how late it was.

Amounts Owed: 30%– It’s calculated by the total of all the amounts you owe for all accounts, the mix of amounts owed (credit cards versus installment loans, for example), and the number of accounts that have balances. Also, how much of your total credit available on credit cards and installment loans you’re using (the closer you are to maxing out your available credit, the more negative the impact on your score), and how much of the original balance borrowed you still owe on installment loans, like your car loan.

Length of Credit History: 15%–As long as you don’t have negative information in your file, the longer your credit history, the higher your score.

New Credit: 10%–This considers how many new credit accounts you’ve opened recently, how long it’s been since you opened a new credit account, how many requests you’ve made for credit recently, how long its been since lenders have requested credit information on you, and how good your recent credit history has been.

How to improve your FICO scoreIt’s important to know that raising your credit score is a bit like losing weight; it takes time and there is no quick fix. The best advice is to manage your credit responsibly over time. Here are 10 ways to improve your credit scores;

1. Order a copy of your credit report annually. Correct any significant errors.
2. Pay your bills on time.
3. Don’t open a lot of new accounts over a short time period.
4. Shop for credit over a short period of time. FICO scores distinguish between searching for credit for a specific loan and searching for lots of different credit lines.
5. If you have a questionable credit history, open a few new credit accounts, use them responsibly, and pay them off on time.
6. Don’t open credit accounts you don’t intend to use.
7. A credit card or installment loan can raise your score as long as you don’t have too high a balance and you pay it off in a timely manner.
8. Keep your balance low in relation to your available credit. If your credit limit is $10,000, keeping your balance below $2,500 (25%) will improve your score.
9. Pay off credit card debt rather than move it around to lower rate cards. Moving balances to other credit cards and closing out the old account can hurt your score because it can change the ratio of your total credit card balances to your total available credit lines.
10. If you are a renter, odds are your Landlord does not report your rental history to the credit bureaus. Having a mortgage and paying on time however is healthy for your credit score.

At My Arizona Home Team, we work with highly qualified, professional lenders who will help you understand and repair (if needed) your credit score. Please contact us for the referral of a good lender.

-Posted by Leah Hamman