It seems more than ever that clients are asking me the question, "does my credit score really matter?" Your credit score has always counted, but I truly believe it will become even more important in the future when you apply for loans that are both mortgage and consumer related. The better your credit score, the better rate you will get offered by the companies loaning the money. In addition, I think it could have an outcome on how future employers view you as well. So, it is becoming increasingly important you understand how your score is calculated and what you can do to ensure a solid score.
What's in your FICO® score
FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining your FICO score.
These percentages are based on the importance of the five categories for the general population. For particular groups - for example, people who have not been using credit for a long period of time - the importance of these categories may be somewhat different.
If you recognize that over one-third of your credit report is determined by how often you pay on time, being a tidy manager of how you pay your bills can be of the utmost importance. Your credit score will track account payment information on all of your accounts including credit cards, auto loans, mortgages, etc. If you use on line bill pay, make sure you pay a few days before so payments aren't consistently late. Having liens, collection items, or delinquencies can really adversely affect your overall credit score. If you are past due, the longer you are past due will add extra weight to decreasing your score. This is why checking your credit report is important because perhaps there is a card you thought was closed for some reason yet it shows as being paid late.
One of the bigger items I talk to people about is your proportion ratio. This is the ratio of the credit you are using against the total amount of credit you have outstanding in the market place. If you have lots of revolving accounts, you should make sure that the proportion ratio is at least 85% in my opinion. That ratio is the credit you are using against the total credit your have available. Paying off debt is a lot more important to help the amounts owed category than moving it around from low balance card to low balance card. I am not as big of a fan of opening new credit cards just to show you have more credit. I am a bigger fan of fewer cards and keeping the ratios as stated above.
Length of Credit History
If you don't have an established credit history, don't rush out to open a whole bunch of new accounts. Your credit score can be greatly improved by being consistent with the credit you are using and showing that you can maintain that credit over an extended period of time. This means even if you are chasing different credit cards because you want new rewards, this can actually hurt you if you move from Visa to Visa card. Try to keep a few lines of credit that you use over and over again to show positive repeat credit behavior.
New Credit and Types of Credit Used
There will always be the need to potentially look at new types of credit in your own individual situation. Consider carefully whether you need more credit cards such as store cards or you can continue using the same cards that you have now. Your credit score can be dinged if you open too much new credit too fast and it will look at the types of credit you are using if you refinance many times in a row.
According to www.myfico.com, please note that:
- A FICO score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score.
- The importance of any factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO score. Thus, it's impossible to say exactly how important any single factor is in determining your score - even the levels of importance shown here are for the general population, and will be different for different credit profiles. What's important is the mix of information, which varies from person to person, and for any one person over time.
- Your FICO score only looks at information in your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.
- Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score.
In the past, a credit score of 650 was considered to be good. If you want to command the best opportunities for loans and credit, I would work hard on these recommendations and try to keep your score in the 750 range.
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