With the lending institutions tightening their underwriting. One of the basis when giving out a loan is the applicant's FICO score. The FICO score is a way to determine the credit standing of an applicant. As a consumer, do you really understand what makes a FICO score? This information was obtained from a mortgage loan officer who came to speak to a class I attended this week.
What makes up the FICO score? An obvious reason is your payment history (35%). Do you pay your loans on time? Second is capacity which comprises 30% of your score. What is your credit limit? 15% is based on the length of credit, 10% of accumulation of debt in the last 12-18 months. The number of credit inquiries and the opening dates of the loans are also taken into consideration. Then lastly, 10% is based on a mixture of credits which are installment or revolving credits, number of finance company loans (the more the lower the score). Perhaps it's time to re-think if you really need to have a credit card for each store found at the Barton Creek Mall. Once, a friend from New Jersey showed all her outstanding credit cards, which could have been enough to wall paper a small room if needed.
As a consumer, you might want to know that your income, length of residence, length of employment or debt ratio has nothing to do with your score. If you are in the market of buying a home, here are some DON'TS or it might hurt your credit score. Don't miss a payment; don't borrow money on your credit cards to the limit; don't close your credit card, it will lower your available capacity; don't shop using your credit card excessively; don't open numerous credit cards in a short time period; don't have more revolving loans in relation to installment loans; don't borrow from finance companies.
So let's say the damage has been done and tomorrow when you wake up, you're a changed person and have become a wise spender. You can improve the score by paying down on credit cards; do not close the credit cards even when the balance is zero (the credit capacity will decrease); continue to make payments on time; slow down on opening new accounts; acquire a solid credit history with years of experience; and move revolving debt to an installment debt.
Next time you put that $500 Coach purse on your charge card, perhaps it's time you take out your checkbook or debit card instead. Better yet, put the Coach purse back on the shelf, save the $500, it will be a good addition to the down payment of your new home!
