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Saturday, August 23, 2014

72. How do I calculate my FICO score and what affects a loan process?

There are different weights by various companies (I believe there are over 50 formulas in use) but here’s a sample of how your FICO score is calculated…

Payment History (35%) – This is the first thing creditors generally look at. Have you paid past creditors on time? What kind of risk will you be in the future based on your past?

Amount Owed (30%) – What you owe on your accounts. What is your credit limit on your accounts? What do you owe?

Length of Credit History (15%) – How long your credit accounts have been open, the age of your oldest account, the age of your newest account, and the average age of all your accounts

Types of Credit in Use (10%) – This will include a mixture of retail accounts, installment loans, credit cards, mortgage loans, etc.

New Credit (10%) – It is generally accepted that opening multiple accounts in a short period represents a greater risk.

Having a good credit score will help you secure better interest loan rates. This is very useful when applying for a car loan or home mortgage loan. Or when you are looking to rent an apartment, sign up for a utility service such as water or electricity, or get a cell phone plan in your name.

Credit scores can even affect job opportunities as many companies will pull a potential employee's credit score during the job application process. 

Other things that can affect loans: Your income, length at current job, length of at current home, other debts, and money already saved up (for a down payment). For any loan having a good down payment and money in the bank always helps lenders feel more secure.

As far as establishing credit goes. Start off by applying for a credit card with a low balance - say $200-300. I got one through CapitalOne my senior of college when I got my first real job at a bank. I used it for expenses like gas and car insurance. I paid the credit card off every month.

I used the golden rule for credit cards: If I didn't have money in the bank to pay off the bill at the end of the month I didn't buy the item or service.

If you can't get a regular credit card consider looking into a secured credit card. With a secured credit card you deposit say $300-1000 into an account. Every time you use the credit card the money is taken out of that account. So it works a lot like a debit card except it helps you build establish credit and build a credit history. We looked into this with Wells Fargo. The application process takes about 10 minutes.

Eventually, as your establish timely payments and your score increases you can get credit card rewards like cash back (1% to 5%) on your purchases or mileage (think 1-2 miles per dollar spent).

Paying cash or using your debit card will not improve your credit score. DO NOT use a credit card for emergencies. Save up a little bit each month to build up your savings or emergency fund. Credit cards typically have 15-30% interest rates.

What do you think? Was this helpful? Leave a comment!