What is FICO Scoring
FICO scoring is a system that lenders and underwriters use to determine what your interest rate on a loan is going to be. If you buy a house or car, the mortgage or the loan is determined by you credit report and your FICO score.
The score is based on the system developed by Fair Isaac Company (FICO) and the interest you pay, as well as monthly payments that are based on your personal credit history and score as well.
Same with a car loan, there is always a premium on car insurance or even homeowners insurance. Your FICO credit score can affect what your rate will be be. Your FICO score can even affect your chances of employment.
FICO scoring is calculated from a multitude of different credit data and it is grouped into five different categories.
We will include in every category a certain percentage to give you an idea of the importance each area plays in determining your personal credit score.
History (35%)
Your payment history is the largest factor in determining FICO scoring. This includes the number of unpaid bills you have, any bills sent to collection, bankruptcies etc. The more recent the problem, the lower your score.
Outstanding Debts (30%)
How much of the total credit line is being used on credit cards and other revolving charges? High balances or more precisely, balances that are close to your credit limit can negatively affect your credit score. Most lenders think 40%-60% of maximum is ideal.
Credit History (15%)
This one surprised me. Just length of history. How long have you had an open credit line. If you have a large credit limit and it has been paid as agreed over a long period of time, this will work the best. Close your old accounts if they are having a negative affect on you.
Recent Pull of Credit (10%)
Whenever you apply for credit, there is always an inquiry on your report and they will negatively affect your score. Some inquires are considered soft pulls of credit. A soft inquiry would be checking your personal credit or your report. Some insurance companies will do a soft pull also so as to not harm your report.
Types of credit in use (10%).
How much is your current amount on your loan in comparison to the original amount due? Is that amount for a car loan or a mortgage? This is what is meant by type. Also, how many account do you have open? If you have three accounts already open, it would probably not be wise to add another line of credit just to get a higher limit. This will hurt this category more than it will help your credit/debt ratio.