I’ve been learning a lot about credit lately—even some things that I didn’t know I didn’t know. Last week, I learned about the factors that make up one’s FICO (Fair Isaacs) score. This is really good information to know, especially if you plan to make a major purchase in the future. Here are the five things that make up your credit score:
Payment history: 35% - This takes into account how often you’ve paid on time, how many times you’ve been late, etc.
Amount owed: 30% - Lenders need to know this information to see how much of your credit you have in use (generally your debt should be no more than 20% of your net income) versus the amount that is available to you. So for example, if you have a limit on your credit card of $10,000 and you’re using $9,500, you may not be an ideal candidate to receive additional credit.
Length of credit history: 15% - How long have you been using credit. Generally, those with longer credit histories have higher scores than those with new credit.
Mix of credit: 10% - This looks at the elements that make up your credit. Ideally, it is better to have different types of credit (student loan, credit card, car payment, store cards, etc.) since each type of credit has its own requirements. For example, the requirements for obtaining a student loan is very different from that a store card.
New Credit: 10% - This looks at how much new credit you’re applying for. If you already have credit and you’re applying for new lines of credit, this presents a risk to a lender and they are less likely to offer you a loan.
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