Lets talk FICO.
So last week for our very first Finance Friday. We discussed the different types of debt and the importance of diversity on your report when looking to make major purchases such as buying a home.
I also briefly mentioned the way FICO scores are calculated and promised to share the module with you all. So here is a breakdown of how scores are calculated.
Understanding this information is vital if you’re looking to establish credit with a particular goal in mind as it can be used as a guide or road map if you will to take you straight to your destination.
So without further ado, see below - a break down.
Payment History is first on the list as it makes up the bulk of your score at a whopping 35%. This is why late payments can be detrimental to your credit and on time payments are an absolute must.
Utilization or Available Credit is second on the list accounting for 30% of your score. This is important because lenders typically don’t like to see usage above 30% of what’s available to you. I advise my clients to over achieve and remain somewhere between 15 and 20 percent.
Credit History is third on the list accounting for roughly 15% of your score. This category represents the length of time you’ve had credit or the average age of your accounts. So if you don’t have credit it’s important to start building like yesterday because 15% may not seem like much but you can’t have payment history or utilization without credit history. On the other hand, this also why acquiring new credit when you’ve already established credit can lower your score starting out. Because this is calculated using your average age of ALL your accounts. Moving along...
Types of Accounts comes in at fourth place accounting for 10% of your score. This category takes inventory of the diversity of your report. Which is what we discussed prior. This is important for major purchases to prove you can handle making payments on different types of loans. In other words to predict your credibility. So this 10% is not to be taken lightly.
In last place we have New Credit and/or inquiries also coming in at 10% of your score. This category takes into account how often you are applying for new credit. And if you are denied new credit often this can be a huge red flag to lenders. Which is why this category is just as important as the others and is also not to be taken lightly.
It’s important to know and understand these categories also because the score is not the sole factor in determining credit worthiness. All these things are considered when looking to get approved for new credit and some matter more than others depending on your goal.
I hope this information was useful. If you need a personal breakdown or help coming up with a game plan to improve your credit we’re happy glad to help.