There are many factors that come in to play when your FICO score is being calculated. Factors such as the types of credit used (car loans or school loans vs. credit card), new credit ( last 12 months), length of credit history, amounts owed on credit and debt, and of course, payment history. You can see exactly how each category effects your FICO score below.
Having a good FICO score can mean getting approved quickly, easily and with a great interest rate. On the contrary, if you have a low score, lenders are going to take higher precaution when extending credit. As you can see from how scores are calculated, the best thing you can do to build your FICO score is to pay on time. Lenders want to know they will be getting money paid back to them in a timely manor. Next, looking at amounts owed on credit cards or other debts, versus the total amount of credit you have available, shows how likely you are to pay those debts back. For example, if you have a credit card with an available credit of $10,000, and you have a balance at the end of your statement cycle of $5,000, or about 50%, it is likely this will negatively affect your score. Keeping these debts under about 30% can help boost your score. FICO looks at the length of time your credit accounts have been established. They look at the newest and oldest account, and then take an average. A longer credit history shows a consumer has been careful with their credit, and doesn’t open and close revolving lines of credit often. Frequently applying for new credit can be damaging to your FICO score if you have many new accounts. New accounts can wave red flags to lenders, making them weary of your ability to pay back these debts. And lastly, the types of credit you use can affect your score. Having a revolving line of credit, like a credit card, and regularly paying it back shows lenders that you are a reliable consumer and will indeed, pay back any debts you incur.
Other things lenders will consider in addition to your FICO score include income, child support, alimony, length of employment, and other income and expenses. So, even if you don’t have a perfect score, you shouldn’t be deterred from applying for credit. Most people think they must have a good FICO score to get approved at all. Actually, many banks offer a secured credit card, a type of card where the consumer puts down an amount, say $500, and is then able to use the card as a regular credit card with an available credit of $500. It is a great way to build your FICO score if your score is low. Typically, after a year of on time payments, the bank will automatically switch the card to a regular card, and voila! You are now the owner of a credit card and you get your original $500 back. It’s a win-win for both the bank and the consumer. Now, if you already have a credit card, and your FICO score is low, but have always payed on time and have low owed balances, it may just be due to the length of time your accounts have been established. Just keep paying on time and you will see an improvement in your FICO score in the future!
Taking each of these points into consideration will help you build your FICO score, and in turn, could help you get a better interest rate when applying for a mortgage or other types of credit. Check out more at FICO’s website.