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Scoring your Credit - How's your FICO?
What is a Credit Score
A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus. This number helps lenders and others predict how likely you are to make your credit payments ontime. These credit scores (FICOs) were developed by Fair Isaac Corporation and are today's most commonly used scoring system. FICO scores range from 300-850, with most people scoring in the 600-700 range. FICO scores above 700 are very good and are a sign of financial health. FICO scores below 600 indicate higher risk and could result in a higher interest rate.
| What Makes up a Credit Score: |
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Payment History |
35% |
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Balances Carried |
30% |
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Credit History |
15% |
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Type of Accounts |
10% |
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Inquiries |
10% |
Why Your Credit Score is Important
Credit scores affect whether you can get credit and what you pay for credit cards, auto loans, mortgages and other kinds of credit. For most kinds of credit scores, higher scores mean you are more likely to be approved and pay a lower interest rate on new credit. Want to rent an apartment? Without good scores, your apartment application may be turned down by the landlord. Your scores also may determine how big a deposit you will have to pay for telephone, electricity or natural gas service.
Lenders look at your scores all the time. They look at your scores when deciding, for example, whether to change your interest rate or credit limit on a credit card, or whether to send you an offer through the mail. Having good credit scores makes your financial dealings easier and can save you money in lower interest rates. That's why they are a vital part of your financial health.
Consider the following example: A couple is buying their first house. They want a 30-year mortgage and their FICO credit score is 720. They could qualify for a mortgage with an interest rate up to three percentage points lower than a couple with a FICO score of 580. On a $100,000 mortgage loan, that difference in interest rate accounts for as much as $2,400 a year, adding up to $72,000 over the loan's 30-year life. Your credit score does matter!
How to Improve Your Credit Score
- Pay Down Past Due Accounts
- Pay Charge Offs and Liens within the past 24 months
- Check Your Limits and Distribute Balances
- Don't Close Your Credit Cards, Keep Old Cards Active
- Call to Eliminate Late Payments from Your Credit Report
- Eliminate Collection Accounts
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Pay Down Past Due Accounts - Any amounts that are past due destroy your credit score. Work at paying down past due balances as soon as possible; then normal payments can be made and will reflect paid on time.
Pay Charge Offs and Liens within the past 24 months - Any charge offs or liens within the past 24 months damage your credit score. Work at paying these as quickly as possible.
Check Your Limits and Distribute Balances - Make sure your credit card company reports your credit limit to the credit bureau and then keeps your card balances at 50 percent of that limit or below. Anything over 70 percent of your limit damages your credit score.
Don't Close Your Credit Cards, Keep Old Cards Active - Keep the number of credit cards you have between three and five to better your credit score. If you need to close some, the newest cards are the ones to close. People that have credit for a longer period of time are assumed to be at less risk of defaulting on payments. Use the old card at least once every six months to avoid it moving to inactive.
Call to Eliminate Late Payment from Your Credit Report - Once you become current on any late payments, contact all creditors that have reported the late payments to the Credit Bureau and request they be removed. Persistence and politeness usually result in success on this one!
Eliminate Collection Accounts - Not all collection agencies will do this but many will, and it is well worth your effort to try. When you are getting ready to pay off a collection, contact the collection agency and make arrangements to pay it off with the condition they remove all reporting from the credit bureaus. Request a letter from them that states this agreement.
Information Provided by
ianna Koontz, Mortgage Loan Officer with Central Bank | 
