The FICO (Fair Isaac and Company) score determines so many things now; if you can get credit, a job, insurance and maybe even married (kidding). With mortgages nowadays, it not only determines if you can get a loan, but how much you have to put down and your interest rate. When shopping for a home, you should know your credit score way before and see if it needs to be improved. Credit scores range from 300- 850, with 850 being the best. For a mortgage, 620 is the new threshold for even getting a mortgage and 720 is the new good score. In order to understand how to improve your credit score, you need to know what affects it. I literally ripped out a page from my book, The New Rules for Mortgages, to explain the breakdown of the FICO. Read it and thing about how you handle your own credit.

Five factors make up your credit score:

1. Payment history takes into account whether or not you’ve paid all your bills on time and for how long.  It accounts for 35% of your score.  If you have paid one or more bills 30 days, 60 days, or 90 days late, your credit score will drop.  The longer your credit history and your history of on-time payments, the better your score will be.  Remember, the computer is reading this, and it likes to see at least 24 months of credit history and at least four tradelines–mortgage, car loans, and major credit cards count most in that order.  Store and gas cards don’t have as much pull.

2. Amounts owed accounts for 30% of your score.  Debt-to-credit ratio is determined by adding up all of your current outstanding balances and dividing that by available credit.  Note: The computer does not like you being maxed out; it wants you owing less than 50% of your available credit- on each card. 

My best advice would be to have a few major credit cards and keep all of them under that 50% mark.  I never suggest paying off your debt before you apply for a loan, because it will not make a difference.  I do say make sure you know what you have, what you owe and keep it under the 50% limit.  I swear this can make a huge difference!

3. Length of credit history, the amount of time you have held each of your credit cards, counts for 15% of your score.  Lenders want to know you can pay off debt over time.  Again, the computer likes to read at least 24 months of credit history.  You will not even get a score unless you have at least 6 months of active credit.  However, it is better to have a few credit vehicles for 12 months than many credit vehicles for 6 months.  Length of credit is more important than quantity of credit vehicles.  That is why it is so important to establish credit and a good payment history early in life.

4. New credit counts for 10% of your score.  Any attempts to acquire new credit (i.e., recent credit or loan applications) will adversely affect your score.  Opening up new accounts means “I need more credit, I spend, spend, spend” to the lender, and that makes the lender nervous.  If you have applied for credit and decided not to take the card the computer will read it as if you were rejected by the creditor!  Remember, you’re not exactly asking the mortgage lender to fork over chump change.

5. Type of credit you use (credit cards, installment loans, etc.) also is a factor in determining your FICO score; although unclear which types hold what weight.  This category counts for 10% of your score.  A good mix is important to establish credit, but once you have a history it will be fine to close some the less important cards (sorry Mr. Bloomingdale’s).  However, closed accounts may still play into your credit score.

You can get a copy of your credit report for free directly on any of the three main bureaus’ sites, but you have to pay for your score.  Don’t get your report from freecreditreport.com because there is nothing in this world for free!  (They sell your info).