We’ve all been there, applying for a new loan with a specialist right in front of you and there’s that 30-second, awkward pause when he checks your credit to see if you qualify. We know that the pause can be nerve-racking, even if you have perfect credit. So how can we know what our score is and how it’s determined before someone looks at it? There is a simple equation that we can use to determine the weighting of credit score and what affects it the most.
According to the Fair Isaac Corporation, the people who make the “FICO” score, there are a combination of things that are weighted differently that determine your score.
Payment History: 35%
The most highly weighted determinate is Payment History. This comes in at 35% of your score. It is determined on how well you pay back loans. Are there late payments on your history? Delinquencies? Bankruptcies? All these factors play a big part in determining what your overall score will be. Your score could increase by a good amount of points if you simply fix this one area.
Amounts Owed: 30%
The next determinant is Amounts Owed, which is 30% of the overall score. This section in your credit score takes into account how much debt you have, and then compares it to how likely you are to pay it back. This, for example, indicates whether or not you should be able to qualify for another loan. If you have 100k in debt, but you can afford 150k in debt, then you could technically apply for another loan (though we wouldn’t recommend taking on more debt!). It’s a good thing when your Amounts Owed is low. You never want to owe too much money because that can lead to more delinquent payments. Having more room for debt is good, but it doesn’t mean you should act on it. Don’t fill that “available” space with more loans and debt.
Credit History: 15%
Length of Credit History is a 15% factor when it comes to determining credit score. The longer your history (good or bad), the more it can positively or negatively affect your credit. It is important to have credit because it can help you in the long run when applying for larger loans such as a car or home. The way lenders may see it, the longer you’ve had credit, the more experience you’ve had dealing with it and paying your debts.
New Credit: 10%
New Credit takes a 10% share of the overall FICO score. The New Credit portion is slightly complicated, but broken down, the new credit part of the score takes into account how long ago you opened a loan and what you’ve paid on the loan. The amount of loans you received in a short amount of time is also viewed and can negatively affect your score. Opening a bunch of accounts around the same time may show that you are having money problems or that you are impulsive.
Types of Credit: 10%
Types of Credit Used is the final 10%. Many people don’t realize that there are different types of credit. I am not talking about what it is used for, but rather how the credit works. For example, credit cards and mortgages are two totally different types of debt, and most people don’t realize that. Credit cards are unsecured, while mortgages are secured. The difference is important to know. Unsecured debt does not need collateral in order to be taken out. That being said, knowing what kind of credit you have is important in verifying what your credit score will look like. More secured debt than unsecured debt is the goal. Try to minimize the unsecured debt. However, make sure that you have a variety. Lenders like to see that you can handle different kinds of debt.
Before you go out and apply for a new loan, check your credit score and see what areas need working on. That way, when a lender runs your credit, you’ll know what it looks like before they tell you. That way you’ll know beforehand if you can qualify for a loan. And if you can’t, you’ll know what to work on so you can in the future.