What is FICO Scoring
FICO scoring is used by lenders to figure out what your interest rate will be on loans you apply for. If you’re buying a house the types of mortgages available to you are based on your personal credit score.
The score is based on the system developed by Fair Isaac Company (FICO) and the interest you pay, as well as monthly payments that are based on your personal credit history and score as well.
The same is true when you get a car loan, as well as the premium on your car insurance or homeowners insurance. Your personal credit score can even affect your chances of getting new employment.
The different methods used to determine your FICO score can be divided into about five different categories.
We will include in every category a certain percentage to give you an idea of the importance each area plays in determining your personal credit score.
Payment history (35%)
Payment history is the biggest factor in determining your FICO score. How many late payment or bankruptcies you have can hurt you significantly and the more recent the negative activity, the worse the score will be.
Outstanding Debts (30%)
Your debt is determined by how much of a revolving line of credit you are currently using. If you have a CC with a credit limit of $100,000, the ideal place to be is a balance of $40,000. This sounds odd but $40,000 shows that you are using credit but that you are keeping it well within your means. Same goes for a car loan. Pay off 60% as fast as you can.
History of Credit (15%)
This was a surprise to me. If you have a car loan, and you pay it off immediately, it is not as good as if you have a car loan drawn out for a long period of time and you make payments regularly. However, keep in mind that the difference you pay in interest may not be worth the higher FICO score.
Recent Pull of Credit (10%)
Any time you apply for something that requires credit, the other party with pull your credit score. Some are soft pulls and some are hard pulls meaning some won’t pull quite as much information and will have little to know affect. Others will. A soft pull would be checking your own personal score or report.
Type of Credit (10%)
How much is still owed on current mortgage loans, credit cards and finance companies compared with the original loan amounts? Also it’s important not to open a number of new credit card accounts just to increase your available credit. It will have the opposite affect and lower your score.
