Path to home ownership…What makes a good FICO Score?

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

On-time payments or delinquencies. More emphasis is put on the most current pay history

• 30% = Capacity

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.



• 15% = Length of Time

The time you first established that credit, the good, bad, and the ugly.

• 10% = Accumulation of debt in the last 12-18 months

Number of Inquiries
Opening dates

• 10% = Mix of credit

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

It will take 24 months to restore credit with one late pay!

• Credit cards at capacity

Maxing out, or living off the credit cards

• Closing credit cards accounts- This lowers available capacity.

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.

• Shopping for credit excessively

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.

• Your ratio of more revolving loans in relation to installment loans

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.

• Borrowing from finance companies

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.

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