Is your credit behind the 8 ball and what can you do about it?From mortgages to credit cards to auto loans, your credit score, commonly called a FICO which stands for Fair Isaac Corporation, is the most important factor that a lender or credit issuer will use in making a decision about you.
Until recently, the factors that made up your score were a closely guarded secret, but recent legislation has opened up the credit scoring industry. Your credit score is generated from a mathematical algorithm, a formula, based on information in your credit file.
Numerous factors are weighted across five categories to calculate your individual score. Your payment history makes up 35 percent of the score. The more late payments in your file, the lower your credit score will be. Debts that are sent to collections significantly reduce your score. Another 30 percent of your score is based on your current and available debt.
The score does not take into account income; rather it looks at the ratio of available debt to current balances. If you consistency “max out” the credit extended to you, your score will tend to be lower than if you carry some debt, but keep it manageable.
The length of your credit history and length of time you have credit will credit issuers comprises 15 percent of your score. The variety of credit that you have makes up 10 percent of your score. Generally, if you have experience with multiple types of debt, your credit score will be higher.
The final 10 percent of your credit score is based on applications for new credit. The model accounts for people shopping for credit and does not lower their scores, but it does reduce scores of those who may be in trouble and are heading toward bankruptcy.
To have a great FICO score, you should carry a manageable amount of debt, have experience with a variety of credit types, maintain long-term relationships with your creditors and lenders, and most importantly – pay your bills on time.
As of September 2005 every U.S. citizen has the right to a free annual report from each f the three major credit bureaus – Equifax, Experian and TransUnion. You can order your free report from www.annualcreditreport.com fill out the questionnaire, and indicate where you would like to receive the reports. You can order your credit report from the credit bureaus directly instead of www.annualcreditreport.com but you’ll pay for the report and they will try and sell you a protection plan that can cost anywhere from $4.95 – $14.95 per month.