Monday, September 12, 2016

How is Your FICO Score Determined?

I want to get back into discussing FICO scores and why it is important to know what yours is.
The fact is, your FICO score is a debt calculated score.  Remember if you have no credit cards, no loans and no mortgage then you will have no FICO score.  If you ever want to get a credit card, a loan or a mortgage you may have issues when you apply for them and may need a coborrower or cosigner in order to qualify.  I will discuss those further when we finish this series, but you do need to know the distinction in case you ever decide to assist someone else in getting a loan or need someone to assist you.  Ok, back to FICO scores and how they are calculated.
The minimum requirements in acquiring a FICO score are at least 1 account opened for 6 months. That account must be reported to the CB for a 6 month period and the credit bureau must get no indication of you being deceased.  A student loan would qualify you to have a FICO score but just because you have a FICO score doesn't mean it's a valid score.
Banks and credit unions have their own ways of determining a valid FICO score, these may vary a bit from financial institution but for the most part this is the criteria:

  • 2 years of credit history.
  • 1 revolving line of credit (open ended, like a credit card)
  • 4 tradelines (a trade line is any credit line other than a student loan; credit cards, personal loans, mortgages are all considered tradelines)
  • And at least 1 tradeline limit of $5000 or more

Now, while these are the things that you need to have a valid FICO score, there is a calculation you can use to actually come up with your FICO score.  These are obviously subjective but this is how the 3 major credit bureaus determine who has a high or a low score:

35% - payment history
30% - Amount owed
15% - length of credit history
10% - new credit acquired
10% - mix of credit

I'm going to go into detail and break it down a bit further but as you can see - repayment of credit is going to affect you the most and how often you apply and what kind of credit you have available to you is going to affect you the least.  So you really want to do your best to pay your bills in a timely manner.

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