| Your Credit Score is used by anyone loaning you money. Credit card companies, home equity lenders, auto loan lenders and finance companies all use a model created by Fair, Isaac and Co, the San Rafael, California company that pioneered credit scoring 40 years ago and dominates the field today. This score is most often known as FICO and serves as a snapshot of your credit history.
A low score can raise the price of your loan and a very low score can mean denial of your loan completely. Here are the approximate percentages that determine your FICO Score.
- Payment history (35%). The largest factor determined on your FICO score is your basic payment history. The number of unpaid bills you have, any bills sent to collection, bankruptcies etc...
- Outstanding Debt (30%). Are your cards maxed out? High balances or more precisely, balances that are close to your credit limit can negatively effect your score. Keep your balances below 30%.
- Length of your credit history (15%). How long have your accounts been open? The longer, the better.
- Recent inquiries (10%). Every time you apply for credit of any kind, you create an inquiry on your credit report. Lots of Inquiries negatively effect your score.
- Types of credit in use (10%). Current loans from finance companies. How many and how much.
Your score will range between 300 and 870. The higher the better. As your score increases, your credit risk decreases. Exact numbers differ by lending institution but the average high approval score is 680 or above. Often times your score is taken from all three credit reporting companies and the middle score or average score is used.
Depending on the lending institution, your score can cost you. Some lenders will charge a higher interest rate if your score is below 600
When you apply for credit your score does not come directly from FICO. Instead each bureau has its own version of the rating system with its own name.
Equifax is called Beacon
Trans Union is Empirica
Experian is Experian/Fair Issac
A credit score of 680 or above can save you money, especially for home loans. If you are considering a significant loan you will want to be sure to check your credit reports first. If negative items appear on your report you have two choices. Live with it for 7 to 10 years or dispute these items.
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