Understanding FICO Scores

There are five major factors that impact your FICO® credit score.

1. Payment history. Even one missed payment can have a negative impact on your score. Payment history accounts for 35% of your Score.
   
   
2. Amounts owed. This is a ratio of your available credit lines vs. the amount of credit used. This ratio can give lenders a snapshot of how you handle credit. Using more than 30% of your available credit is a negative sign. Credit utilization accounts for 30% of your Score. To get your highest score in this area, keep your usage under 20% and USE your credit cards. A credit card with a zero balance is not as helpful as you think. Creditors like to see you USE your credit, just not too much of it.
   
   
3. Credit history length. The age of your credit history accounts for 15% of your Score. This includes the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts. Be VERY careful when disputing an old account. That late payment from 7 years ago won't hurt your score, but if the creditor decides to delete the inactive account (to "correct" the late payment), your score can drop dramatically if the rest of your accounts are fairly new.
   
   
4. Credit mix. Credit scoring models look at the types of accounts you have and how many of each you carry as an indication of how well you manage your credit. As a general rule of thumb for those with fairly new credit, you will want to have 3 credit cards, 2 installment accounts and at least one other type of credit account. You credit mix accounts for 10% of your Score.
   
   
5. New credit. The number of new credit accounts and the number of hard inquiries made when you apply for credit, accounts for 10% of your Score. Too many accounts or too many inquiries can indicate increased risk, and can hurt your credit score. Lenders see this as financial "desperation" when there are multiple hard inquiries in a short period of time. If you are just establishing credit, try to apply for cards that do not perform hard inquiries.

Looking to Build Credit? (notice: referral links are below. I may earn a referral fee if you use my links)

• Self.inc has a great program for a savings & credit card account with no hard inquiry. You start with a credit builder account (installment loan) and after a few payments, they issue a credit card letting you access the funds that you have already paid into the loan. So you get BOTH an installment loan AND a credit card reported to the credit reporting agencies with the SAME money.
  
  
• CreditStrong also has a personal installment loan program that works like a savings account. They secure the "proceeds" of your loan into a CD and you make payments each month. Once the loan is paid in full, they unlock the CD and you receive your funds. This is a GREAT way to build credit while saving for a downpayment. Plus you can cancel anytime and get all of your payments back (minus interest).
  
  
• Discover IT Card has a secured card option that you can start with as little as $200. Although they do perform a hard credit inquiry, this is, in my opinion, the BEST secured card you can get. Because, after 8 months of using your card and making monthly payments on time, they convert the card into a $1,000 unsecured Discover Card. Of course this may change, but at the time I wrote this page, that program was still available.

When applying for a mortgage, it is important that you understand how lenders see your creditworthiness.

Unlike the Vantage 3.0 credit score, which is provided by several free credit monitoring websites, FICO® is the Score that 90% of Lenders Use. So the scores that you might think you have, may not be the scores that lenders see.

Most free websites like Credit Karma use the Vantage 3.0 score, which the score that most consumers "think" they have because that is what they see on consumer websites.

Your FICO score is different from any Vantage score and you cannot get it for free on a consumer website. You might, however, see a FICO 8 score, which is still a consumer score and NOT what mortgage lenders use to determine your creditworthiness. Lenders use FICO 2, FICO 4, and FICO 5 scores. These are only available through paid services like Credit Plus. (see link at bottom of this page)

In fact, there are MANY scoring models including ones for credit cards, insurance, and car loans that differ according to the purpose of the credit extended to you.

Each credit reporting agency has their own credit scoring systems and, unfortunately, the scores that lenders use to extend home loans are not available for free.

In the beginning stages of preparing to apply for a mortgage, you can use these free consumer scores as a guide to help you improve your credit and score. Some have credit repair tools that will help you contact creditors and correct information on your consumer reports.

However, when we are ready to submit your mortgage application for processing, there is a fee for your credit report.

At the time that I wrote this page, the fee is $26.50 and has been that for a while. The credit report fee is the ONLY fee a lender can charge you when applying for a home loan.

At Ocean Capital Lending, we provide a link where you can pay this fee directly to the credit report furnisher, Credit Plus.