What Makes Up My Credit Score?
By
Zachary M. Potojecki
First,
there is a slight correction I must make to the title before we move forward.
Whether you rejoice or regret discovering this three-digit
number that defines your financial well-being, we often refer to it incorrectly.
It
should say, “What Makes Up My FICO?”
At URW, we use the Fair Isaac Corporation, or FICO for
short, which is the industry-standard for measuring creditworthiness of a
consumer, ranging from 300 to 850. The vast majority of lenders use FICO as
their standard for credit approvals. There are three different FICO versions,
which are TransUnion, Experian, and Equifax. At URW we use TransUnion.
You’ve probably seen a commercial for Credit Karma, Nerd
Wallet, and Quizzle. These apps are intriguing, as they offer free “credit”
checks at the touch of a button. While they do offer a good insight on what
your credit score may be based off of your financial history, they are
typically not as accurate compared to your FICO score. Also, they do not have the
same standards to rate your credit.
An individual’s FICO score is made up of 5 factors. The
first and largest factor is based on payment history. Payment history consists
of 35% of the credit score and it is more heavily weighted toward the most
recent pay history. This means that your pay history is going to be more
positively or negatively impacted by the last 12 months of pay history versus
pay history further out than that.
Approximate credit weight for each year:
·
40% = 0-12 months
·
30% = 13-24 months
·
20% = 25-36 months
·
10% = 37+ months
The next largest factor is the amount of capacity you have
available on lines of credit and credit cards. Capacity makes up 30% of your
FICO score. Our last blog broke down the details of how credit cards can help
your score improve. If you haven’t read it yet, click here to check it out.
The last three factors are much simpler, but together make
up the remaining 35% of your FICO score. One is the length of time you have had
credit. It takes time to gain credit, and this time is a 15% portion of the
credit report. Unfortunately, this is not exactly fair to young adults who have
not borrowed before and have zero credit. On the bright side, at URW, our
lending specialists will offer a share secured loan to help you build a
history. After roughly six months, we will offer a credit card to boost
capacity and to keep building history.
Following this is your accumulation of debt in the past
12-18 months, which is 10%. This is also includes your number of inquiries. Inquiries
are any time you apply for credit, whether it be a personal loan, mortgage,
auto loan, credit card, or a line-of-credit.
The last 10% is a mix of credit. This mix of credit is
between installment loans that raises your credit and revolving that lowers
your credit. Keep in mind, the revolving only lowers your credit if it is
excessive and you use a majority of your capacity on credit cards. Using
secondary finance companies also reduces your credit score as well.
I hope that this has been beneficial to you and has helped
you better understand what your FICO is actually made up of. Understanding how
your FICO score works is the first step to improving your overall score. For questions
and more detailed examples regarding your score, stop by one of our branches
and ask to see a lending specialist to break down your credit report with you.
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