Credit score is something that you’re always listening about, but do you know what really impacts it? Here’s a quick guide to understanding FICO score, and what you should and shouldn’t do.
Having a good credit score is mandatory for getting a mortgage and purchasing a house. But what influences it, and how can you predict what your score is? Most lenders use FICO score to determine how good your credit report is. But how is FICO score calculated? Below is most important information you need to know for better understanding FICO score. Let’s get started!
What Categories Get Into Your FICO Score?
FICO score looks at your credit report and calculates both positives and negatives. For understanding FICO score, here’s a little example. Making late payments will lower it, but if you re-establish a good track record and pay all your debts on time, you may raise it up, again. This isn’t the only thing that influences your FICO score. Still, here are the categories that may cause your credit score to change.
Payment history typically makes a 35% of your FICO score. This makes it the most important part of the credit score. If you have a bad payment history, you are considered high-risk, which is why this category is something most people would look at first. If you’ve missed your payment a few times – don’t worry, this won’t have a too big impact. An important part of understanding FICO score is that most single mistakes aren’t irreversible. However, if you’re regularly late, or if you’re late for more than a few months, this can be a problem. Also, even if you have a perfect payment history, you might not have a perfect FICO score due to other categories, so this isn’t a guarantee.
The amount you owe on your credit makes around 30% of your FICO score. If you owe money on your credit accounts, this isn’t an issue. Credit accounts serve that purpose. However, if you owe too much, you might be overextended. In other words, the amount of money you owe extends the chances of you not being able to make your payments on time. How much is too much depends on your income and whether or not you’re making your monthly payments on time. This includes how much money you owe on all accounts, and how many different accounts you have overall.
How long is your credit history
Understanding FICO score isn’t simple, as there are many catches and exceptions to the rule. This category is the proof of that. Overall, a long credit history will raise your FICO score. However, if the report looks good, even people who don’t use their credit for a long period of time will have high FICO score. Length of credit history takes 15% of your FICO score.
Opening up new lines of credit makes 10% of your FICO score – usually negatively. If you open too many new lines of credit for a short time, this is a sign of concern. This is especially the case if you don’t have an extended credit history, as it might signal some financial issues. If you’re applying for mortgage, don’t open new lines of credit before you’ve closed the purchase. Otherwise, you might get denied your loan, sometimes even if you’re pre-approved.
Mix of credits
Mix of credits makes up another 10% of your overall FICO score. Mix of credits, or credit mix, is actually how many different types of credit you have. This includes your credit cards, installment loans, retail accounts, mortgage loans, and finance company. If you have a big variety of credits, and you manage to pay your monthly debts on time, this is a great sign, as you are able to manage several different kinds of account. As we’ve mentioned, though, make sure you don’t open many new lines of credits in a short amount of time.
Credit Categories Vary from Person to Person
Every credit report is unique, just like their owner. While there are five categories that have a basic value for the overall report, their percentages might change and one might be more important than the other. This is especially the case if we compare someone who didn’t use their credit for years, and someone who has a long credit history. As your usage of credit changes, so does your credit report, which then further influences your FICO score. So, understanding FICO score isn’t as simple as just learning about these categories. There are many things that go into the calculation, but if you know what can cause the score’s decline, you’ll hopefully know how to prevent that from happening.
Is Credit Score Enough to Get Approved for a Mortgage?
While understanding FICO score is essential for ensuring it is high enough at the right time, just because your score is adequate, that doesn’t mean you’ll get approved for mortgage from this score alone. Your lender will look at many things before he approves you, including your income, where you work, and do you pay your utility bills on time. Despite this, your credit report is the most important thing that has to be great, otherwise all else factors don’t really matter. Failure to get a mortgage is also the main reason why sales fall through, which is why many sellers rather opt to sell with a direct buyer, such as Sparks Property Investors LLC, which pay in cash.