In the mysterious world of personal credit ratings, most consumers do not access their own credit reports, nor do they know upon what basis their scores are determined. Since we real estate professionals have ready access to this information, we’d like to share it with you. Here are the five factors that account for the vast majority of any “Fair, Isaac and Company” (FICO) credit score.
35% of your credit score is based on how you’ve repaid your obligations. The more credit you have used and paid consistently on time, the better your score.
30% is based on your debt-to-available-credit ratio. The lower that ratio, the better your score. Here’s an example: if you have a home equity line of $100,000 plus 4 credit cards, each with $5,000 limits, your of total available credit equals $120,000. If you have borrowed $5,000 against the credit cards and $10,000 on the home equity line, your debt amounts to $15,000, or 13% of your available credit. However, if you have $20,000 in available credit and have borrowed $15,000, that’s a 75% ratio, which results in a much lower score. Here’s a tip – if you have any unused credit cards, don’t cancel them unless they are costing you a lot annually. Even if you’re not charging anything to them, they still add to your available credit on file!
15% of your score is based on the amount of time you’ve managed credit. If your file lists years of experience, you’ll do better than someone whose oldest credit experience only dates back a few months.
10% of your score is based on how many different types of credit you’ve handled in the past. Repaid debts usually remain on file for many years. The more of them you have paid responsibly, the better your score.
The final 10% is based on new credit applications and credit “queries.” Each time you apply for credit, a query hits your file. If you have a lot of these in a short stretch, it might send a message of impending bankruptcy, thus damaging your score. Exceptions are auto or home loans, because the queries indicate that you are rate-shopping – a responsible credit activity.