Fair Isaac Company (FICO) gathered information from the Big 3 credit bureaus (Equifax, Experian, and TransUnion) to develop a numeric value, known as your FICO score, to determine your creditworthiness. The FICO score ranges from 400 to 850. The higher your score the better. This is how your FICO score is calculated:
- Payment History: 35%
- Amounts Owed: 30%
- Length of Credit History: 15%
- New Credits or Accounts: 10%
- Mix of Credit: 10%
- Payment History: Pay your bills on time, even if it means the minimum payment. It’s better to be late than to never pay at all. For example, a 30 day late payment on our VISA is considered a “2” on your credit report. That dinky little hospital bill you never paid back in college is considered a “9” on your credit report. Delinquent accounts will plummet your credit score. A recent missed payment will tank your score. Strive to have all “1’s” on your credit report.
- Amounts Owed- Never owe more than 50% of your available credit limits. This measurement is considered you debt to available credit ratio. Add up all your balances. Add up all your available credit limits. Divide what you owe by what’s available. This percentage should never be more than 50%. Just because credit is available, don’t use it all. This counts for 30% of your FICO score.
- Length of Credit History- Have you ever applied for a mortgage? Did the “professional” tell you to clean up your credit y closing out old accounts? That happened to me. Don’t close out old accounts because they help your FICO score. They represent established credit and the longer the better. If you have to close out accounts, close out newer retail accounts like that Express card.
- New Credits: Never apply for new credit all at once. Not only does it create several inquiries on your credit report (especially credit cards and retail cards), it sends a red flag to lenders. It signals that you are strapped for cash and living off your credit. Rule of thumb: Apply for new credit every six months.
- Mix of Credit- Lenders want to see that you can handle various forms of credit whether it’s revolving (credit cards), retail (Express Card), or installment loans that have fixed monthly payments (mortgage and auto).
Check out Shay Olivarria’s book Money Matters: The Get it Done in 1 Minute Workbook or Suze Orman’s book The Money Book for the Young Fabulous.
Please let me know if this information is helpful by leaving a comment. If you have any questions, holler at me or Shay. One of us will be able to answer your questions.
P.S. Remember, everything has beauty—including YOU. It just takes a true D.I.V.A to see it!
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