The news has been riddled lately with stories of the power of a positive credit score, and what you can do with it. But, since my job as real estate agent is helping folks buy homes, and as a Texas Affordable Housing Specialist supporting home ownership retention – I am going to give a quick refresher on what makes good FICO score, and how to get one.
What is FICO? – It is an acronym for Fair Isaac Corporation, and that Fair is not as “in plays fair with others” rather a engineer named Bill Fair, and Isaac a mathematician provided consulting services in decision management. They developed the FICO score to rank credit risk, which all 3 major US consumer reporting agencies adopted.
What makes up the score?
- 35% = Payment History
- 30% = Capacity
- 15% = Length of Time
- 10% = Accumulation of debt in the last 12-18 months
- 10% = Mix of credit
On-time payments or delinquencies. More emphasis is put on the most current pay history
By totaling your monthly loan payments, including credit cards, student loans, car loans and any other monthly payments. Do not include rent or mortgage. Then list your monthly income after taxes. Then, divide the total owed by the total earned. You are considered to be in debt danger zone at 25%. Consider reducing your debt level by cutting your spending and diverting those funds to your credit payments.
The time you first established that credit, the good, bad, and the ugly.
Number of Inquiries
Opening dates
Installment credit or loans, such as a car loan, when used, and paid on raises your score vs. Revolving credit, such as credit cards, or department stare credit cards lower the score when used and not paid off monthly. Also, the number of finance company loans the more, the lower the score
What actions will hurt the score?
- Missing payments – Regardless of $ amounts
- Credit cards at capacity
- Closing credit cards accounts- This lowers available capacity.
- Shopping for credit excessively
- Your ratio of more revolving loans in relation to installment loans
- Borrowing from finance companies
It will take 24 months to restore credit with one late pay!
Maxing out, or living off the credit cards
You have the credit, but you DO NOT HAVE TO USE IT! Just leave them open, but monitor them against identity theft. This is one most people, including myself have never really understood because I would think it would be better to have credit I may actually use, or would be better to use if there is better interest rate, grace period or rewards programs. But the experts say, Do not close that credit.
When shopping for a mortgage you can still safely look for the best credit available to you up to about 3 – 5 times without getting a ding on your FICO score, since you are shopping for the same type of credit.
For example, if you have $20,000 worth of credit card debt, which is revolving, and you only owe a say $8,000 on your car loan, which is or should be an installment loan. You may consider a debt consolidation loan, or a home equity loan to eliminate that credit that is not helping your credit score as much as an installment would.
These are competitors of commercial banks in providing credit to households, Competitors of commercial banks in providing credit to households and firms, unlike banks they do not accept deposits. In my experience they prey on the down on their luck, or hard-times borrowers.
What doesn’t affect the score?
- Length of residence
- Length of employment
- Debt ratio
- Income
FICO does not score, or rank your total income, or the ratio of debt to income the lender themselves determine this.
Approximate Credit Weight for each year
- 40% = current to 12 months
- 30% = 13-24 months
- 20% = 25-36 months
- 10% = 37+ months
How to improve the score?
- Pay down on credit cards
- Do not close credit cards because capacity will decrease
- Continue to make payments ON TIME
- Slow down on opening new accounts, and if you will soon be applying for a mortgage, do not open ANY accounts until checking with your lender.
- Moving revolving debt to installment debt.
Follow these steps, and acquire a solid credit history and you will ensure yourself a lifetime of credit worthiness.
Related Articles:
- USDA Rural Development – Texas Guaranteed Housing Loan Program In this chapter of the Affordable Housing series of articles, I am going to try to bring a clear and accurate depiction of the benefits, purposes, and qualification guidelines for...
- USDA Home Loans are the Real Deal for Denton County Once again I find myself having to tout and sound the trumpets about the USDA Rural Development Guaranteed Housing Loan Program after another successful closing. Next to the article Buying...
- FHA Housing Limit in Denton and surrounding counties of North Dallas Texas What is the maximum FHA / Fannie Mae Mortgage amount for North Dallas? This is a question that gets asked of me, and searched for a lot I have noticed....
- Updated Restrictions and Income Limits for USDA Rural Development Home Financing It has been more than a few weeks since I last posted an article on USDA Guaranteed Housing program, the fact is I am working with many clients on this...
All Rights Reserved© Jay Myers (972) 510-7800 Licensed Real Estate Agent in Texas with Fathom Realty LLC
{ 2 comments… read them below or add one }
The one thing I have always never understood….
1) Your score goes down if you open up a credit card.
2) Your score goes down if you close a credit card.
Those 2 don’t make sense to me…. then why even try to establish credit via a credit card? I don’t get it!
I think it should be….
1) Your score goes down if you open up a credit card.
2) Your score goes up if you close a credit card.
Till then,
Jean
Yes, the whole system does seem a bit out of whack. I am very curious to see what happens when the millions people who have had short sales and foreclosures are not going to be able to get credit due to the scoring system.