We can all agree your credit score – aka FICOⓇ score – is a big deal when it comes to securing any kind of loan. In fact, it factors into whether you'll be approved for a loan—as well as the rate of interest you will be charged.
The basics of credit scores
In simple terms, your credit score represents the likelihood that you’ll pay back a loan. Knowing what factors feed into your FICO score is also a big deal. Your credit score is largely calculated by your payment history and amounts owed in addition to some categories that are weighted less such as the length of credit history.
Paying every bill—not just credit cards—on time AND using 30% or less of your credit limits can make the biggest impact.
Let’s take a closer look at these two make-or-break credit categories…
Pay your bills on time, on repeat
The biggest factor when determining your credit score is payment history. This one factor makes up 35% of your overall score and for good reason.
Lenders want to know you borrow responsibly and can pay off debt reliably. To measure this, they’ll look at credit cards, retail accounts, installment loans (like car loans), finance company accounts and mortgage loans.
And although you can’t change history, you can improve upon your past performance by:
Ensuring your bills are paid on time.
Tip: Set up auto-pay.
Getting, then staying, current on any missed payments.
Tip: Contact your creditors to see if they can adjust your terms so you can pay off your debt faster.
Consolidating your debt.
Tip: Find out if a home equity line of credit (HELOC) is the right solution to help you achieve your goals.
It’s important to note: Cellphone bills are not typically reported so won’t likely be considered when calculating your FICO score. Enlist the help of a service like Experian Boost™ to add those payments manually.
Keep track of your debt … and limit credit usage
The amount of debt you owe is the second most important FICO factor and makes up 30% of your overall score.
How much money you owe can reveal if you’ve overextended (or maxed out) your resources. Using a lot of your available credit makes you more likely to make late or missed payments.
The five factors feeding into this category are:
1. The amount owed on all accounts.
The total balance on your last statement is generally what shows up in your credit report.
2. The amount owed on different types of accounts.
Just as with payment history, credit cards, retail accounts, installment loans, finance company accounts and mortgage loans are all reviewed.
3. The total number of accounts with balances.
Owing across multiple accounts can indicate a higher risk of over-extension.
4. Credit utilization – the percentage of available credit you’re using.
Here, it’s important to note that your lender will typically report the account balance from your most recent monthly statement. So, even if you pay your credit card balances in full each month, your balance won’t necessarily show as $0 on your credit report.
5. How much of an installment loan amount is still owed.
Paying down installment loans is a good sign that you’re able to repay debt.
Know your credit health & build from there
Knowing your FICO Score will give you some sense of whether or not you’ll qualify for a new line of credit or loan. Checking your credit score frequently can also help you detect identity theft early.
In fact, contrary to urban myth, checking your credit score won’t lower your score. If your scores are low – falling below 580 – you can take action to improve your FICO. Or, if you see incorrect information, you can dispute it and make sure it’s removed.
Here are some other ways to access your free credit score:
• Through your credit card issuer —usually free
• Through your bank — usually free
• Via Experian Boost – available to everyone, free
Begin the journey to your dream home—get your FICO score today!
One of most important steps toward home ownership is checking your FICO score and making the necessary changes to get that score as high as possible. By paying your bills on time, limiting debt and checking your scores on a regular basis you can begin to make amends to anything that has damaged your score along the way.
Need guidance to improve your score or just want to learn more? You can always connect with us here at Spring EQ – we’re happy to help!