Here’s the good news: The higher your FICO score, the less money you’ll pay in interest.
Take a look at a example below of mortgage interest rates (and payments) as calculated for each type of FICO score — from “high” to “low.”
It illustrates how, if your score is sitting at 650 now and you raised it just 100 points, you can save almost $250 per month in payments. That adds up to a whopping $390,000 in interest over a 30 year loan!
What Factors Go Into Your Credit Score?
Because it’s the most widely used, in this report we’re going to focus on how to improve your FICO score. But first let’s take a
look at how it’s calculated. Your credit score is determined by the following estimated % breakdown: 
- 35% Payment history
- 30% Outstanding debt
- 15% Length of your credit history
- 10% Recent inquiries on your credit report
- 10% Types of credit in use
1. PAYMENT HISTORY.
This takes your track record into account and accounts for 35% of your score. The first thing any lender wants to know is how timely you’ve been in paying loans in the past. Late payments will automatically drop your score, while a good track record on most of your credit accounts will raise your score.
Public record and collection items such as bankruptcies and foreclosures will show up in this section, but if they are more than ten years old…they shouldn’t do too much damage if your’re current payment obligations are up-to-date.
2. OUTSTANDING DEBT.
Approximately 30% of your FICO score is based on this category. When you have hit or almost hit the credit limit on all, or most, of your accounts, your credit score will be lower. To a lender, this means that you’re over-extended...and may be at risk for making late payments (or, worse, NO payments).
3. LENGTH OF CREDIT HISTORY.
15% of your score is based on this category. FICO looks at the age of your oldest account, your newest account and the average age of all your accounts. Generally speaking, a longer credit history — especially if it shows a steady record of timely payments — will increase your FICO score.
4. NEW CREDIT.
If Your Have Old Accounts…If you only have a few credit accounts and some of them are old and never used, consider buying something small with those to keep them open. Then pay them off in full. This will keep those creditors from closing your accounts and will also make it easier for them to give you new or higher credit if you need it. |
10% of your FICO® score is based here.
If you’ve opened several credit accounts in a short period of time, it presents a greater credit risk and can lower your score.
By the same token, if you’ve submitted applications to several different creditors, this could also affect your score. Every time you apply for credit, an inquiry is placed on your credit report. This inquiry can temporarily lower your credit score as much as 5 points per inquiry.
Also, potential creditors will assume too many new accounts or too many
inquiries mean you are about to jump into a heap of debt…so you may no
longer be a good risk at that point.
5. TYPES OF CREDIT IN USE.
10% of your score is based on what kind of credit accounts you have — FICO looks at your mix of both revolving and installment-type accounts including credit cards, retail accounts, finance company accounts and mortgage loans. You don’t have to have one of each to get the highest score.
For more than 20 years, we have tirelessly worked for the American consumer through our television shows, radio programs, best-selling books and financial roundtables. Put that experience to work for you! Check out our 10-Steps to Living Debt Free.
How is YOUR Score?
Generally speaking, if your FICO score is over 700, you’re considered an excellent or at least a very good credit risk, and you won’t have problems getting a great loan rate.680 to 699 is still considered good, but lenders may not offer you the same rate deals as they do to those who have scores over 700.
620 to 679 is considered fair, and anything below that is considered poor.
Remember that your FICO score is based on information in your credit report, so it’s mission-critical to make sure the information in your report is accurate. So, the first order of the day is to get a copy of your credit report.
You can request a copy directly from any of the three major credit-reporting agencies: Experian (www.experian.com), TransUnion (www.transunion.com), and Equifax (www.equifax.com).