How to keep your FICO scores high - Raise your FICO score

CREDIT SCORES How to keep them high

In an effort to keep clients up to date on information that could affect your credit worthiness on a daily basis, I am providing you with an insight as to how your credit score is determined. I know you have heard from lenders, auto dealerships, credit card companies, etc. about your “credit scores”. I hope this explanation will assist you in understanding how the scores are formulated and how you can maximize your credit standings.

For better or worse credit scoring is here to stay. The main inventor of the modern day credit score is a company called Fair Isaac. They have found that credit scores are an incredibly accurate predictor of future default rates or late payments.

Fair Isaac has proprietary mathematical formulas for creating the credit score. They based their formulas on the research of millions of credit files. Many people refer to these formulas as a “black box” because they are kept a secret.

They determined they needed to use 33 or more variables to create a score. Then, they grouped the variables into five categories. Fair Isaac assigned each variable in each group with a weight factor, or point system. Add up the points for each group and you have a credit score. The five categories Fair Isaac found to most predictive (with their relative weighting in parentheses) are:

1. Past Payment Performance: (35%)

The more recent the late payment, the lower the score. A 30-day late payment today hurts more than a bankruptcy five years ago.

2. Credit Utilization: (30%)

Has the borrower maxed out their credit cards? Low balances on a few cards, is better than high balances on one or two cards. Keep balances below 30% of the credit line to increase the likelihood of a higher score.

3. Credit History: (15%)

The longer the accounts are open, the better the score. Lower scores result when the borrower has recently opened new accounts. This is true even if the borrower obtained lower rate credit cards to pay off the balances on higher rate cards.

4. Types of Credit in Use: (10%)

Loans from finance companies rather than banks or credit unions lower the score.

5. Inquiries: (10%)

Only inquiries made by the borrower are factored into the score. These include applications for a mortgage, credit card, or auto loan. Multiple inquiries that reflect the borrower’s activity to shop for the best rate are handled as follows: The Fair Isaac model ignores all auto or mortgage related inquiries that occur in the 30 day period prior to the date the credit score is requested. Fair Isaac calls this the “buffer period”. Prior to the buffer period, the software also notes earlier inquiries and counts ahead 14 days from each one. In any 14 day segment, the software then counts all auto and mortgage related inquiries as just one inquiry. Inquiries by others are not included. Examples are employment inquiries, promotional inquiries, and account management inquiries.

I hope this information has assisted you in a clearer understanding of the credit scoring process. Please don’t hesitate to contact us if you have any questions or concerns. You can reach us at 805 582-0750 or via Email us