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Lesson C: Credit Scoring

FICO Score
Five parts to your FICO Score

Payment history-
(35% of your FICO score)

Have you paid your credit accounts on time? Late payment, bankruptcies and other negative items can hurt your credit score. But a solid record of on time payments helps your score.

How much you owe (30% of your FICO score)

FICO scores look at the amounts you owe on all your accounts, the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to your credit limit, the lower your score will be.

Length of credit history (15% of your FICO score)

A longer credit history will increase your score. However, you can get a high score with a short credit history if the rest of your credit report shows responsible credit management.

New Credit (10% of your FICO score)

If you have recently applied for or opened new credit accounts, your credit score will weigh this fact against rest of your credit history. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you need a loan, do your rate shopping within a focused period of time, such as 30 days, to avoid lowering your FICO score.

Other factors (10% of your FICO score)

Several minor factors also can influence your score. For example, having a mix of credit types on you credit report - credit cards, installment loans such as a mortgage or auto loan, and personal lines of credit is normal for people with longer histories and can add slightly to their scores. Your score is also affected by the amount inquires made.

What is a good Score?

Score range from 300 -850

A good score falls in the mid-700s. You will get the best interest rate assuming a FICO score above 680. Score above 720 and the rates get better. If you get above 750 you’d see another improvement in the points.

Score below 600 would indicate that you are a high risk consumer and generally would disqualify you for a low interest rate.

Exercise

The first step to improving your FICO Score is to know where you stand. Go to www.myfico.com and request your score.

Use the following chart to determine what interest rate you would qualify for.

your FICO score is	Your interest rate is	...and your monthly payment is
760 - 850	6.28%	$1,334
700 - 759	6.5%	$1,365
680 - 699	6.68%	$1,391
660 - 679	6.89%	$1,421
640 - 659	7.32%	$1,484
620 - 639	7.87%	$1,565

Provided courtesy of myfico.com

Quiz

1. If you have a score below 600 you are more likely to have a high interest rate.
True False

2. Length of credit history is 25% of your credit score.
True False

3. Making timely and consistent payments is the best way to improve your score.
True False

4. Maxing out your credit card balances won’t hurt your score.
True False

5. Having a healthy mix of credit types can increase your score.
True False

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