Learning About Your FICO 8 Score!

Do you know what makes up your credit score? Here is a breakdown of the five main things that make up your score, and what your lender will be looking at when reviewing your credit report.

PAYMENT HISTORY-

Your payment history makes up the biggest chunk of your score. It is so important to make sure you are payments on time. Even a day or two late still counts as late! A late payment, also known as a delinquency, will typically fall off your credit reports seven years from the original delinquency date.

AMOUNTS OWED-

This is what the lenders call your "Debt to Income Ratio". Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.

LENGTH OF HISTORY-

The typical timeframe is the last six years. There are many factors that lenders consider when looking at your credit history, and each one is different. The typical timeframe is the last six years, but there are many different factors that lenders look at when reviewing your mortgage application.

TYPES OF CREDIT-

The Four Common Forms of Credit-

• Revolving Credit- This form of credit allows you to borrow money up to a certain amount. The lending institution sets a credit limit, or the most you can borrow. In revolving credit, the borrower revolves the balance by rolling from month to month until it is paid in full. Interest charges typically occur for any revolving balance. As the money is paid back, the difference between the maximum credit limit and the current balance is available to be borrowed. This is the most common form of credit issued by credit cards, such as Visa, MasterCard, and store and gas cards. Credit cards are considered unsecure credit because there is no collateral securing the amount borrowed.

• Charge Cards- This form of credit is often mistaken to be the same as a revolving credit card. However, the major difference between a credit card and a charge card is the credit card can carry a balance, whereas the charge card must be paid in full each month. If the balance is not paid on time and in full, penalty fees will be added. American Express is an example of a well-known charge card. This form of credit is advantageous against accumulating credit card debt.

• Installment Credit- Installment credit involves a set amount borrowed, a set monthly payment and a set timeframe of repayment. Interest charges are pre-determined and calculated into the set monthly payments. Common forms of installment credit agreements are home mortgages and auto loans.

• Non-Installment or Service Credit- This form of credit allows the borrower to pay for a service, membership, etc. at a later date. Generally, payment is due the month following the service, and unpaid balances will incur a fee, interest, and/or penalty charges. Continued non-payment will result in service cancellation and can be reported to the credit bureau, affecting your credit score. Service or non-installment agreements are very common in our everyday life. Cell phone, gas and electricity, water and garbage are all examples of service credit.

Amount of New Credit-

When considering your amount of new credit, FICO® Scores take into account how many new accounts you've recently opened and whether you've been rate shopping for a single loan or applying for multiple new credit lines. Opening several new credit accounts in a short period of time indicates greater credit risk.

What to Do if You Do Not Have a Credit Score-

If you want to establish and build your credit but don't have a credit score, these options with help you get going!

Get a Secured Credit Card- A secured credit card can be used the same way as a conventional credit card. The only difference is that a security deposit—typically equal to your credit limit—is required when signing up for a secured card. This security deposit helps protect the credit issuer if you default and makes them more comfortable taking on riskier borrowers. Use the secured card to make small essential purchases and be sure to pay your bill in full and on time each month to help establish and build your credit. Click here to learn more about how secured cards work and here to browse Experian's secured card partners.

Become an Authorized User- If you are close with someone who has a credit card, you could ask them to add you as an authorized user to jump-start your credit. In this scenario, you get your own card and are given spending privileges on the main cardholder's account. In many cases, credit card issuers report authorized users to the credit bureaus, which adds to your credit file. As long as the primary cardholder makes all their payments on time, you should benefit.

For questions or more credit building tips, contact me today!!