Per Wikipedia, a FICO score is a is a number representing the creditworthiness of a person or the likelihood that person will pay his or her debts.   FICO score has shown to be very predictive of risk, made credit more widely available to consumers and lowered the cost of providing credit.

Lenders use FICO scores to determine your creditworthiness and the interest rate on your mortgage will directly relate to the health of your FICO score.

There are 5 main categories that go into your overall credit score calculation.

It’s important to understand each one and how much each counts towards your overall FICO score.

1. Payment History is by far the most important category- it is pretty much self explanatory.  It doesn’t  take a rocket scientist to figure out that if you pay your bills on time, you’ll do well in this category.  Likewise, if you have a history of late payments, collections, charge-offs, public records, etc. you will not fair well here.  The number of negative items on your credit report is important.  The more incidents of credit transgressions, the more your scor will suffer.  The most recent negative information carries more weight than the negative items which are several years old.
2. Debt is a Very Close Second – The most important non-payment category in your credit score is, by far, the amount of debt that you carry.  And while your installment debt like auto loans and mortgages are factored into your score, it’s really your credit card debt that is most important.
   • Visa, MasterCard, Discover, American Express, gas cards and/or retail cards like Macy’s or Target fall into the credit card category.  The balances that you carry on these credit cards can affect your FICO scores almost as much as whether or not you make your payments on time.
   • This category calculates the proportion of balances to credit limits on your revolving credit cards accoutns.  This is referred to as “revolving utilization”.  Simpply put, the higher your revolving utilization percentage, the fewer points you will earn in the category.
   • How is revolving utilization calcuated?  To determine your revolving utilization, you’ll need to add up all o fyour current balances and all of your urrent credit limits on your open revolving credit accounts (except for your HELOC – Home Equity Lines of Credit.)  this will give you a total balance and a total credt limit.  divide the total balances to the total credit limit and then multiply that number by 100.  this will give you your total revolving utilization percentage.
     • For Example:  Total Balances $12,000 ÷ Total Limits $25,000 = Total Revolving $.048 x 100 = Utilization % of 48%
   • The lower your utilization  percentage, the more points you’ll earn and he higher your FICO or credit score will be! 
   • To earn the most possible points in this category, you shoul try to keepyour revolving utilization at 10% or less.  If you can’t reach 10%, just remember that the lower the better.  While 50% is better than 60%, 40% is better than 50% and so on.
   • That is why financial experts do not recommend that you close down these revolving accounts once the balances are paid off.  Leave them open and do not charge anything to them.  This will decrease your utilization score.
   • How you pay your bills and your revolving utilization score accounts for 2/3 of the points in your credit score!
3. The Age of your Credit History is considered a Secondary Category – Don’t confuse this with your age.  It’s the age of your credit reports.  Basically, the score is looking to see if you have a lengthy history of managing your credit obligations.  The age of your credit history is determined by the “date opened” on the oldest account listed on your credit report.  The older your credit report, the more points you will earn in this category.  There’s really not much you can do here except to wait it out.  As your reports get older, you will gradually earn more points.  This means that you should never try and get old, good accounts removed from your credit reports.  You want history!
4. New Credit Inquiries is also a  Secondary Category – when you apply for credit you are giving the lender permission to pull your credit reports and credit scores.  Each time this happens, your credit report will reflect what is called an “inquiry”.  To perform well in this category, you should really apply for credit when you need it.
   • When you are shopping for a mortgage loan for your new home, try to apply with several lenders in a period of a week or so.  Credit agencies recognize that you are shopping around for a best loan and will not “ding” you for these inquiries.  The longer you wait in between inquiries, the higher the chance that the credit score will be affected
5. Credit Mix is our final Secondary Category – in essence this means that you will do wll in this category if you have a nice diverse list of different types of accounts in your credit report.  This inludes morgages, auto loans, installment loans, credit cards, etc.  If your credit report is dominated y one type of account (or lack of others), this could negatively affect the number of point that you earn from this category.

To recap, the 5 easy steps to a credit makeover include:

1. Pay your bills on time!
2. Keep your credit card debt low – below 10% utilization is optimal.
3. The longer you have credit, the better.
4. Apply for credit ONLY when you need to.
5. Diversity in your accounts is good!

If you are looking at homes for sale in Pasadena or the Greater Los Angeles area, give Irina Netchaev & Associates (real estate agents) a call at 626-204-3340 for a free and comprehensive buyer consultation.