Sunday, March 07, 2010

FICO 8: The New Credit Score

Your credit score it is one of the most critical factors in your financial life and determines if you will be approved for a loan or line of credit. A credit score is a number developed by the Fair Isaac Corporation (FICO) that lenders use to rate potential customers in determining the likelihood that a customer will pay their bills on time.

A credit score determined by using five main criteria as defined by your payment history (35%), the total amount owed (30%), the length of your credit history (15%), new credit (10%), and types of credit used (10%).

Payment history shows the history of how you paid your bills either on time or late but unfortunately does not show if your bills were paid before the due date. Amounts owed show the total amount of debt you owe. The length of history indicates how long you have had credit. If your credit history is 2 years or less this could lower your credit score.

New credit indicates how many times you have applied for new credit. If you open too many new accounts in a short period of time this may lower your credit score. The types of credit used indicate the types of accounts you have such as revolving or installment accounts. Revolving accounts are usually credit cards and installment accounts are usually mortgages, auto loans, etc.

The FICO 8 credit score which was developed in 2009 ranges from 300-850 with 850 being an excellent score and 300 being the worst score. The FICO 8 uses the existing 5 factors from the original FICO score plus 4 additional ones: high credit card usage so keep credit card balances at 20% or below the credit limit; isolated late payments do not weight as heavily on your credit score as multiple late payments; authorized user accounts are factored into your credit score; and small balance collection accounts with a balance of $100 or less are not factored into the credit score.

Your credit score varies from each credit bureau because each agency collects their own data from various sources and may collect different data for the same account. Your score can vary anywhere from 5-80 points between the three credit bureaus.

Your credit score changes due to updates to your credit report which changes based on account activity such as balance changes or additions to your credit file (i.e. new accounts or deletion of older negative accounts more than 7 or 10 years old). As a result, you may see a difference in your score from one month to the next.

If you plan on purchasing a large item such as a car, house or investment property, pull your credit yourself to see if any negative items appear so you can fix those issues before applying for a loan.

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