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The Secrets behind the FICO Score
If there was a number which could represent your financial well being to the companies you have to do business with in life, it would be your credit score. This secret number influences how much you pay for car insurance, your vehicle, your rent or mortgage payments, cable and phone down payment amounts and even employment decisions.
If you aren’t completely sure what a credit score is and how it works, take a moment to review this important information.
Your credit score is basically an algorithm that calculates a lenders risk of doing business with you. It is based on several factors, which each affect a percentage of your score.
Payment History – 35%
Payment history is the most important factor of your credit score and represents 35% of your total credit score. The payment history calculation is based on your reported payment history. Any issues with late payments, accounts which have defaulted, and all other negative information will have the greatest impact. Accounts which are paid-as-agreed will provide the biggest benefit to raising your score.
Debt to Credit Ratio – 30%
The second most important criteria influencing your credit score is the amount you owe compared to your maximum limits. This is graded both individually and collectively. You will receive a higher score if you owe 30% or less of your maximum borrowing ability in total, however individual cards and credit limits need to be kept at this point or less as well. If you have five cards with 10% borrowed and one with 90% borrowed, the one high debt card will have a big impact on lowering your credit score, even if the total debt to credit ratio is still below 30%. If you have high credit card balances, you may be damaging your credit score almost as much as making late payments.
Length of Credit History – 15%
The reported age of your accounts comprises 15% of your total credit score. The older the average age of your accounts, the better it is for your credit score. That is why we always advise our clients to keep old accounts open, even if you don’t use them any longer.
New Debt Acquisition – 10%
How much credit you are applying for in the short term also has influence on your credit score. This factor considers how many requests for new credit you have made in the previous 12 month period. Each time you apply for credit and a credit report is “pulled”, you receive a mark on your credit report, known as an inquiry. Too many of these over a short period of time will negatively impact your credit score.
Account Types – 10%
The number and kind of your accounts affects your credit score. The credit scoring entities will give you a better score for having a mix of accounts including a mortgage, at least 3 credit cards, an auto loan and several other smaller accounts. Having many credit cards, multiple mortgages or other account ratios which raise red flags will likely lower your credit score.
How to achieve great credit:
The information you have just read explains the vast majority of what it takes to have great credit. As you can see, it isn’t difficult to understand how to do it, but having the discipline to do it is what is required to be successful. Pay accounts on time, keep your balances low, have several types of credit on your credit report, and refrain from applying from credit that you don’t need. Follow these simple steps and you will be on your way to a fantastic credit score.
About the Author
Kent Greenfields is currently the Senior Client Relations Specialist at Liberty Credit Consulting. He specializes in helping consumers establish excellent credit scores and then leverage those scores for access to the best possible credit products and services. Kent is also the author of High Performance Credit Repair and Bad Credit Kryptonite, credit repair books currently available on Amazon. For more information or to download our dispute letter library with your book purchase, visit Kent’s Amazon Author page at KentGreenfields.com.