What is a FICO Score?
Date Added: March 28th,
2006
By Chris Stallman
| E-mail
"I was recently told
by a friend that credit scores are important and that my "FICO" score
can determine if I get an apartment or not. Is this true?
And what determines what my score will be?" - Cayna (Plymouth,
MI)
Yes, your friend
was entirely correct--your credit score is important and it can
help determine if you qualify for an apartment or not. We'll
break this topic down and answer some more specifics about FICO
scores and how they're calculated.
A FICO score is a credit score that is calculated by
various components in your credit report. As you might have
read in an article that we wrote
a while ago, credit reports are like your report card when it
comes to managing your credit. Lenders, such as credit card
companies, are the teachers that grade your performance. All
of this is put together into a summary that helps future lenders
determine how credit-worthy you are.
While
the credit report might be a summary of all of your credit history,
lenders don't always want to wade through this information.
Sometimes they just want a quick score that will allow them to make
an easy decision about whether or not to lend to you. This
is where the credit score comes in. The credit score takes
all of this data in your credit report and calculates a score from
it. The higher your score, the more likely it is that you'll
get more credit and a lower rate.
The FICO score in particular is a score that is calculated
by a company called Fair Isaac. This score is used primarily
by mortgage lenders but is also used for a variety of other reasons,
including determining if you qualify for an apartment or cell phone.
Fair Isaac reports that it calculates credit scores approximately
as follows:
Payment History:
35%
--Are you routinely late?
Amounts
Owed: 30%
--How much do you already
owe? Obviously if you owe a lot, you'll have a hard time getting
additional credit
Length
of Credit History: 15%
--Have you had credit
for a long time? If you just got your first credit card, you'll
have a hard time qualifying for a $500,000 mortgage.
New Credit:
10%
--Have you recently applied
for new credit?
Type of
Credit Used: 10%
--Are you using revolving
credit or is it installment loans? Obviously having high credit
card balances looks worse than having student loans or a car loan.
Other Important Factors Not
in Your Credit Score
It's important
to note that your credit score doesn't say everything about you.
Many lenders will recognize this and look for other sources of information
in making their decisions. For example, while good credit
is important for getting an apartment, landlords will also ask about
your income and references. If you have good references (previous
landlords), it'll help out. Also, the income is important
because some properties will require that you gross a certain multiple
of the rent. For example, an apartment I was recently looking
at requires that your pre-tax monthly income is 4x the monthly rent.
This means that if rent is $700/month, you need to make at least
$2,800/month before taxes.
Improving Your Credit Score
Here are a few
tips that will hopefully help you improve your credit score over
time. Keep in mind that credit score improvements don't happen
overnight, though.
-Always making your monthly
payments: This shows companies
that you're responsible with your credit.
-Having few credit cards and
keeping them for a long time: The
longer you have a credit card, the better your score. And the fewer
credit cards, the better.
-Carrying low balances or
regularly paying them off: It's
always good to have a low balance but it's also good for your
credit if you regularly have high balances and pay them off right
away. Like if you make big purchases but pay them off the next month.
-Having reasonable lines of
credit: Someone who has a
$2000 limit on their credit card will improve their credit better
than someone with a $500 limit, if they're responsible. But
too high
of limits can be bad.
Your credit score is one of the most important pieces
of your past that will follow you around. It's important that
you work to improve your score if you want to enjoy lower interest
rates and easier access to capital.
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