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A Guide to Understanding Your FICO Credit Score, Part 1


The importance of your credit score cannot be understated. Your score will affect your ability to get a loan and, in the end, how good (or poor) your score is can save you money or cost you money.

In this issue, we’ll take a look at the five factors your FICO (Fair Isaac Corporation) credit score is based on, how each factor is weighted, and what you can do to improve your score in each area. In the next issue, we’ll answer some of the most frequently-asked questions about credit scores.

The Five Factors That Determine Your Credit Score

1. Payment History (35%): Whether or not you’ve paid your past credits on time. HOW TO IMPROVE IT: Of the five factors your credit score is based on, this is by far the most important. Very simply, you need to pay all of your bills on time, especially the specific loan (mortgage, car loan, etc.) you’re looking to get, if you already have that type of loan.

2. Amounts Owed (30%): The ratio of your overall credit balances to your overall credit limit. HOW TO IMPROVE IT: Pay down your outstanding balances. As a rule, you should keep your credit balances at less than 20 percent of their limits. People with the best credit scores have an average of about 7 percent of balances to limits.

3. Length of Credit (15%): How long you’ve had your total credit (the average age). HOW TO IMPROVE IT: Generally, the longer your credit history, the better your score will be. The best way to improve in this area is to keep all of your long-term accounts open and, of course, in good standing. You should never close an “old” credit account just because you rarely use it.

4. New Credit (10%): Recently opened accounts or accounts opened within a short period of time. HOW TO IMPROVE IT: Building up credit is a good idea, but try not to open any new credit accounts if you’re planning on applying for a loan within six months to a year. Also, avoid opening a lot of credit accounts at one time because this may be a red flag that you’re having financial difficulties.

5. Types of Credit Used (10%): The varying types of credit (revolving and installment). HOW TO IMPROVE IT: You should have a history of both types of credit. Installment loans are loans which you pay off a set amount each time (such as a mortgage or student loan) and revolving credit is credit that you can use and then repay (such as a credit card).

For the best advice about your specific credit situation and how to improve it, contact your lender or broker.

For more than 25 years, Omega Financial has been serving mortgage clients in Massachusetts. Our brokers have approximately 50 years in the mortgage business. You always will receive fast, courteous, and accurate information. Omega Financial, Inc. is a company duly licensed to operate in Massachusetts as a Mortgage Brokerage. We are located in the Town of Norwood, Massachusetts where we have been operating as Omega Financial Incorporated since 1988. Licensed by the Commissioner of Banks - License No. MB2671

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