Your Credit History Is Spelled FICO

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Mortgage lenders use a special type of credit score, called the FICO, to gauge your creditworthiness. Here’s what your FICO score is made of and how to manage each component that goes into it, according to Lynnette Khalfani-Cox, contributing editor to CardRatings.com. Here’s how it breaks down.

  • 35% of your FICO score is based on your payment track record. How reliable will you be in paying back your mortgage? Lenders think they know based on how reliable you are now paying your current bills and debt.
  • 30% is based on the amount of debt that you have charged, especially credit card debt. The ‘credit utilization ratio’ is how much debt you do owe on a card compared to how much you could owe. If you have charged $3,000, and your limit for that card is $5,000, you are using 60% of your utilization rate. If you have charged $500 on that same card, your utilization is 10%. Perhaps ironically, lenders want to see that others trust you – as indicated by high limits – but that you exercise self-restraint by not using the credit you have available.
  • 15% is based on the length of your credit history. The longer your history, the better an idea lenders have as to how you will pay your mortgage. When you open new accounts, you’ve lowered the average age of your accounts. New accounts dilute your track record.
  • 10% of your score is based on the mix of credit– mortgage, installment loans (cars, student, fixed repayment schedule), and revolving credit, which is credit card debt. Revolving credit is considered the wild card, because lenders aren’t sure how much you’ll charge, or when.
  • 10% of your score is based on inquiries about your credit (from any lender, from a car dealer to another mortgage lender) and new credit applications. A burst of inquiries indicates that you are gearing up for a big purchase. Fortunately, informational inquiries – such as requesting the free credit report you are entitled to by law – doesn’t count towards that 10%. But inquiries from lenders and other indications that you are poised to get a big loan, do pull down your credit report.