Home Financing: The Making of a FICO Score
Most of us have heard of a FICO score and know it is used to determine whether a lender will approve a loan, and how much interest will be charged over the lifetime of that loan. But do you know how your FICO score is calculated? If not, read on to discover the five main ingredients that make up a FICO score, listed in order of highest impact to lowest.
1. Payment history: Approximately 35% of your FICO score is determined by your payment history on all credit accounts, including retail accounts, student loans, mortgages, car payments, judgements and wage liens. Bankruptcies, short sales, foreclosures, credit defaults and late payments will all have a serious negative impact on this payment history component.
2. Amount owed on accounts: 30% of your FICO score will be determined by “credit utilization”. This is determined by how much debt you owe overall, what types of debt you owe, the current amount owed on installment loans compared to the original loan amount, how many accounts show balances owed, and how much of your available credit is being utilized. So for example, if you have a credit card with a $1000 limit, and you owe $700, you are utilizing 70% of your available credit. Lenders view high percentages of debt to available limit to be a negative factor when determining credit worthiness.
3. Length of credit history: 15% of your FICO score is determined by how long your credit accounts have been open. In general, your oldest credit accounts and newest credit accounts are averaged to determine a “length of credit” score. If you are looking to boost your FICO score, avoid closing your older accounts. Maintaining accounts in good standing for a number of years shows banks that you are a responsible borrower.
4. Recent inquiries: Approximately 10% of your FICO score will be determined by how many inquiries have been made by lenders and new accounts have been opened over the past 12 months. Statistically speaking, borrowers who open several new accounts at once are more likely to default, so banks are looking for a minimal amount of inquiries. The exception to this is when a consumer is rate shopping for a new mortgage or auto loan. Several inquiries for the same type of financing within a 30 day period will be counted as one inquiry for scoring purposes.
5. Types of Credit: Finally, 10% of your FICO score will be determined by how many types of loans and credit accounts you have. Banks want to see whether a borrower has experience with a variety of credit types, and how they have managed these accounts. It is not necessary to have experience with every type of financing, but generally banks want to see both retail accounts and fixed installment accounts such as auto loans and student loans. Of course, these accounts only help your FICO score if they are in good standing!
If you have questions about your overall credit worthiness and what it will mean for your chances of loan approval and interest rates, it is always a good idea to talk to a qualified lender or mortgage broker. These finance professionals can assist you in obtaining a clear picture of your overall credit history, and help you determine where you can make adjustments to improve your score.
Contact us today for more information about Daytona Beach Real Estate (386) 299-4043.