FICO is a branded name credit score and stands for Fair Isaac Corporation, which originally developed this method of measuring an individual’s creditworthiness through a number of factors. FICO scores range from 350 and 850.
What’s in your FICO Credit Score?
FICO Scores are calculated from a lot of different credit data which can be grouped into five categories Payment History, Amounts Owed, Length of Credit History, New Credit, and Types of Credit Used as outlined in the chart. The percentages in the chart are based on the importance of the five categories for the general population and reflect how important each of the categories is in determining your FICO score.
Why FICO Credit Scores are Important?
Banks, credit companies and other financial institutions usually take a look at a number of factors before approving any loan. They will normally look at a person’s income, marital status, employment, length of stay at the current residence, and of course the FICO score. People with higher FICO scores will definitely have a better chance of getting approved in comparison to people with lower scores.
How to Improve One’s Credit Score?
It’s important to remember that the items in one’s credit report will stay there for at least seven years, so the negative marks will have to stay there for quite some time before disappearing completely.
One way to prevent a low credit score is by paying on time. Payment history is the most important factor when it comes to credit scores. Paying on time will slowly raise credit scores. Another thing that can be done in order to raise credit score is by reducing the amount of debt. Aside from payment history, debt is the second most important factor for one’s credit score. Reducing debt as much as possible can help increase credit score as well.
Don't Buy A Car Just Before Looking for a Home!
In conclusion, a word of advice not directly related to FICO scores. When people begin to think about the possibility of buying a home, they often think about buying other big ticket items, such as cars. Quite often when someone asks a lender to prequalify them for a home loan there is a brand new car payment on the credit report. Often, they would have qualified in their anticipated price range except that the new car payment has raised their debt-to-income ratio, lowering their maximum purchase price. Almost every time you sit down in a car dealership, it generates two inquiries into your credit.
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