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FICO: Your Personal Financial Score Card

by Tabitha Naylor

Those looking to secure a loan learn very early how important a credit score really is. It can determine whether or not a lending institution approves your loan application. Furthermore, your credit score influences the interest rate offered to you by a bank or other lending organization.

Put simply, a credit score is a number assigned to you based on an analysis of your credit history. All of your credit history is entered into a computer. The computer analyzes this information and then assigns a number. The major credit ranking agencies do not use the same software, so you might be assigned a slightly different number from each of them. Credit scores are sometimes referred to as FICO scores. This is because Fair Isaac Corporation developed the software most commonly used to determine credit scores.

So, what aspects of your credit history matter most when your FICO score is calculated? Different factors are assigned different percentages in the calculation of your overall scores. Your payment history, amounts owed, and the types of credit you have are all factors in your personal credit score. Here is an approximate percentage breakdown:

Payment History

Records of amounts and schedules of payments (including late payments) account for 35%. Lending companies see the length of time you've been past due as well, as the amount of time since you had a past due payment.

Amounts You Owe

Any loans or debts you have outstanding counts as 30% of your score. Lending companies have a chance to see how many accounts you owe money to and what balances you currently owe. They also review your credit lines for indications that you might currently be overextended.

Length of History

This area accounts for 15%. Mortgage lenders review how long your accounts have been open, and how much time has passed since there was activity in your accounts. The longer and better your credit history, the better your scores will be in this area.

Types of Credit

The number and types of accounts you have makes up 10% of your FICO score. You will receive a better score is there is a variety of account types, as opposed to just credit card accounts.

New Credit

This area is also worth 10% of your credit score. Under this heading, mortgage companies see the number of new credit inquiries you have made and the number of accounts you have recently opened. Banks and lending institutions want to ensure that you are not trying to open a lot of accounts at the same time, thereby overextending yourself and your financial obligations.

Now you might be wondering, what is considered a good score?

Credit scores usually fall between 350 and 850. The higher your score the better, since the higher your score is, the less of a risk you are perceived to be. Banks and other lending institutions feel they are more likely to get their money back from people with high FICO scores because these types of people have a good history of managing and meeting their financial obligations. The less of a risk you appear to be, the more likely you are to have your loan application approved.

So, for those with less than perfect credit scores, you might be wondering what you can do to improve your score? It takes time, of course, but it's never too late to start practicing proper financial management strategies. Make sure you pay your bills on time and keep your credit card balances low. Also, try to avoid opening a lot of new accounts in a short period of time, since this can alter your score under the new credit heading. Mortgage companies are looking for people who are able to successfully manage their financial matters, so it takes time to make a favorable impression, especially if your current credit scores are poor.

You also want to take a close look at the information on your credit report and ensure that it is up-to-date and accurate. If the credit agencies have incorrect information, your FICO score is most likely incorrect.

Credit and debt can be difficult for anyone to handle, but you need to remember that it is not only the amount of debt you have that influences your credit scores, but also the manner in which you manage it.

About the Author

Tabitha Naylor is an experienced mortgage broker/consultant with Apex Financial Mortgage. For more information, or additional resources on home loans, visit Apex Financial Mortgage

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