Wednesday, April 14, 2010

What Affects My FICO Score

Your Credit Score, Your Money & What's at Stake (Updated Edition): How to Improve the 3-Digit Number that Shapes Your Financial Future My local Credit Union always sends out a monthly newsletter with our account statements. Inside they had a breakdown of what you might do to improve your FICO credit score. 

Payment History - 35%
  • Pay your bills on time.
Amounts Owed to Creditors - 30%
  • Don't owe a lot of money to a lot of people. Another way of saying this is to only use a small percentage of your available credit.
Length of Credit History - 15%
  • Keep fewer cards for a longer period of time.
New Credit - 10%
  • Don't increase debt obligations right before applying for a mortgage.
Types of Credit Currently in Use - 10%
  • Maintain a mix of credit - mortgage, credit card, car loan, for example.

The big takeaway here is that Payment History and Amounts Owed are the two biggest factors in your credit score. Together they comprise 65% of your FICO score. Getting a new card might hurt a little, but not too much. Missing a payment will set you way back.

If your Amounts Owed category is too high, but you are making all your payments, you might consider raising your available credit as a means to improving your score. Ask your current credit cards for a raise before you run out and open another account because your older cards will weigh in more favorably on your score. Please, only raise your limits if you are not going to run out and max out your card again! 

Remember, the purpose of the FICO score is to evaluate you as a borrower. It is a way to calculate risk. Will you default or will you pay back your debt?

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