How are my FICO® Scores calculated?
FICO® Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).
Credit reporting agencies
There are three credit bureaus: Equifax, TransUnion and Experian.
www.AnnualCreditReport.com is the only source of
free credit reports and is authorized by federal law.
Reduce the amount of debt you owe
Stop using your credit cards. Use your credit report to make a list of all of your accounts. Check recent statements to determine how much you owe on each account and what interest rate they are charging you. Come up with a payment plan that puts most of your available budget for debt payments towards the highest interest. Pay at least the minimum amount on all other accounts.
Payment history tips
Contributing 35% to a FICO® Score calculation, this category has the greatest effect on improving your scores, but past problems like missed or late payments are not easily fixed.
Amounts owed tips
This category contributes 30% to a FICO® Score’s calculation and can be easier to clean up than payment history. Owing money on credit accounts doesn’t necessarily mean you’re a high-risk borrower with a low credit score. However, when a high percentage of a person’s available credit is used, it can indicate that a person is overextended and more likely to make late or missed payments.
Keep balances low on credit cards and other revolving credit: high outstanding debt can affect a credit score. Lenders prefer to see less than 15% of your available credit used. Do not charge more than 30% of your available credit. For example: Your credit limit is $500. Do not charge over $150.
Pay off debt rather than moving it around: the most effective way to improve your credit scores in this area is by paying down your revolving (credit cards) debt. In fact, owing the same amount but having fewer open accounts may lower your scores.
Don’t close unused credit cards as a short-term strategy to raise your scores. NEVER close an open account unless it is costing you money!
Don’t open any new accounts and don’t apply for ANY new credit!
Length of credit history
Most credit histories only get better with age. Though length of credit history only accounts for 15% of your credit score, it’s still an important influence on lenders, and can definitely impact the chances of whether or not you get a loan.
Though some people haven’t had credit for a considerable length of time, they can have a high FICO® Score. If the rest of their credit report looks good, a longer credit history will always have a positive effect on FICO® Scores.
When it comes to length of history, your FICO® Scores take three things into account:
If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your scores if you don’t have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.
New credit tips
Note that it’s OK to request and check your own credit report: this won’t affect a score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers. Use www.annualcreditreport.com
How much will credit inquiries affect my score?
The impact from applying for credit will vary from person to person based on their unique credit histories. In general, credit inquiries have a small impact on one’s FICO®Scores. For most people, one additional credit inquiry will take less than five points off their FICO Scores. For perspective, the full range for FICO Scores is 300-850. Inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports. While inquiries often can play a part in assessing risk, they play a minor part. Much more important factors for your scores are how timely you pay your bills and your overall debt burden as indicated on your credit report.
Types of credit use tips
Know what should not be in your credit report. There are a number of things that are legally not allowed to be included in your credit history. These banned items are a mix of factors that do not directly impact your credit worthiness and items that do reflect your history but are excluded because of law or common practice. If any of these items are on your credit report, you have the right to have them removed. Banned items include:
Repairing your credit also means you have to wait the appropriate amount of time until bad items disappear. When negative information is accurate, often the only recourse you have is to wait for those items to disappear on their own. Unfortunately, time might be the only recourse you have to repair your credit report.
After a Chapter 7 Bankruptcy Discharge. In most cases, you’ll need to wait two years from the date of your Chapter 7 bankruptcy discharge before you’ll qualify for a home loan. Keep in mind that a discharge date isn’t the same as the filing date.
Conforming mortgage programs treat Chapter 13 bankruptcies differently, depending on their cause and their conclusion. The waiting period for some but not all Chapter 13 bankruptcies is two years from the discharge date. With a conventional Fannie Mae loan, for example, the waiting period is set at two years if you’ve dealt with extenuating circumstances and the clock starts ticking once you receive a bankruptcy discharge. If you’re considering an FHA loan, the waiting period can be shortened to one year if the bankruptcy filing came as the result of a job loss, but you’ve since gained steady employment.