The Last Judgement
Last week credit companies made some changes to how your FICO score is calculated.
If you are buying a house, refinancing a house, or renting an apartment- you are being judged based on your credit score. I am not one of those people who advocates being obsessed with your score. I spent two years of my life obsessively reading and worrying about how every minor financial event in my life impacted my score, which is silly. Obsessing about credit is unhealthy, but understand the scoring process staying on top of how to put your best foot forward to creditors is a good thing!
Credit scores range from 300-850. The lowest I have ever encountered was a 463, the highest I’ve seen was 840. Both of those people made about the same income, it was all about how they managed their money. The average credit score in america is about 678. If your score is 700 or above, your interest rates should be low and credit should be readily available to you.
Here is a breakdown of how scores are determined, from Suze Orman:
What the FICO Score Measures
The five main categories of information that the FICO score evaluates, along with their approximate weightings, are:
- Payment history (35%)-Aside from extreme events, like bankruptcy or tax liens, late payments have the greatest negative impact on your score. Recency and frequency of late payments count too. In other words, even though a 60-day late payment is not as risky as a 90-day late payment in and of itself, a 60-day late payment made just a month ago will count more than a 90-day late payment from five years ago.
- Outstanding balances (30%)-Evaluation of your total balances in relation to your total available credit on revolving accounts is one of the most important factors in the FICO score. Owing a great deal of money on many accounts or “maxing out” on various credit cards can indicate that a person is overextended, and is more likely to make some payments late or not at all.
- Length of credit history (15%)-Your score takes into account how long your credit accounts have been established in general, how long specific credit accounts have been established, and how long it has been since you used certain accounts.
- New Credit (10%)-Research shows that opening several credit accounts in a short period of time does represent greater risk-especially for people who do not have a long-established credit history. Multiple requests will reduce your score because it looks like you are either trying to get a high amount of credit (possibly because of a cash flow problem) or that you are being rejected by lenders and having to apply elsewhere.
- Types of credit (10%)-The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your score takes into account what kinds of credit accounts you have, and how many of each. The score also looks at the total number of accounts you have.
Many people are aware that you can check your credit report for free at the three bureaus for free once per year. This is a great way to make sure there is no fraud or incorrect information on your credit report- but many people don’t realize this does not generate a score. To generate a score go to MYFICO.com. If you’re checking your score for the first time, or if it’s been more than a year, go big and get the package which shows your score from all three credit bureaus as well as tools to show you how to improve your credit over time. They can even calculate how certain financial decisions (like buying a car, or getting a Macy’s Store Card) will impact your score in the future.
