The FICO score weight
The most important factor that determines whether you are lent a mortgage, or any other major loan for a variety of purchases, is your Fair, Isaac and Company (FICO) score.
Your FICO score basically represents your overall credit risk to lender. Most borrowers only know what there score is (many do not even know that), but if you understand how the FICO score is computed, you may be able to raise your score or eliminate errors.
The informative article, “How to Read a FICO Report” posted on themortgagewire.com, breaks down the components of the FICO score and how much these components contributes to your overall score.
The five components that comprise of your thee-digit score are: length of credit history, number of open accounts, loans, mortgages and public records.
“If your credit score is above 680, you are considered a ‘prime’ or a low risk in terms of someone who wants to rent or lease to you. If your score is below 680, you are ‘sub-prime’ and fall in the middle category in terms of risk of renting/leasing. Anything below a 560 is considered a ‘shafted’ score and this person is not someone who is a good credit risk.”
The heaviest weighed component of your FICO score is previous credit performance, or payment history. Payment History on accounts includes credit cards, retail account, installment loans, finance company accounts and mortgage loans.
Late and defaulted payments are tabulated to create an individual payment history score or rating. This figure represents 35 percent of your overall FICO score.
The next component is your current level of indebtedness, or amount owed. This figure comprises of 30 percent of your total FICO score.
“Total amount owed on all open accounts. Paying off your credit cards in full every month does not mean that they won’t show a balance on your report. Your total balance on your last statement is generally the amount that shows in your credit report.”
Your credit length, or amount of time your credit has been active counts for 15 percent of your FICO score.
For the most part, the longer your credit history results in a better or higher score. But younger people need not worry because since credit length equates to only 15 percent of your FICO, if payments are made on time, you should still be able to receive a high score (although not the highest).
Pursuit of new credit has a 10 percent impact on your FICO score. Every time you apply for a credit card or loan, the agency or lender pulls your credit report. This is referred to as an inquiry.
“Inquiries are typically seen as a request for credit and thus are factored as if you are searching for credit. Too many inquiries look bad. While there are no good inquiries, there are neutral inquiries. These are most often known as Consumer Initiated. A request for your credit reports shows as a consumer inquiry. Inquiries created as a result of periodic reviews are not supposed to be factored into your credit score.”
The final important FICO score component is types of credit experience (10 percent). There are a variety of possible types of credit experience such as installment loans, retail accounts, credit cards and mortgage.
“This score is not normally a key factor in determining your score but it can help a close score. Your score takes into account what type and how many accounts you have, the optimal ratio of installment versus revolving accounts depends on your profile, and differs from person to person.”
Your FICO score is complicated and many people with low scores have had years of bad credit management. But if you are on the cusp of “prime” and “sub-prime” lending, you can use this information to rise, or at least understand, your score.
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