Contributed by: Matt Trujillo, CFP®
If you have ever financed anything before, then you are probably familiar with the concept of your “credit score.” This number, or score, can play a significant role in your life as it has real implications when you go to purchase a home or car, to name a few big ticket items. Most of you reading this probably have a sense of what your current score is, but have you ever wondered how that score is calculated?
Here is a quick break down of the composition:
35%: Payment History
Naturally payment history is one of the biggest components of your credit score. Have you paid your bills in the past? Did you pay them on time?
30%: Amounts Owed
Just owing money doesn’t necessarily mean you are a high risk borrower. However, having a high percentage of your available credit being used will negatively impact your credit score.
15%: Length of Credit History
Generally having a longer credit history will increase your overall score (assuming other aspects look good), but even people with a short credit history can still have a good score if they aren’t maxing out their credit and are paying bills on time.
10%: New Credit Opened
Opening several lines of credit in a short period of time almost always adversely affects your score. The impact is even greater for people that don’t have a long credit history. Opening multiple lines of credit is generally viewed as high risk behavior.
10%: Types of Credit you have
A FICO score will consider retail account credit (i.e. Macy’s card), installment loans, mortgage loans, and traditional credit cards (Visa/ MasterCard etc). Having credit cards and installment loans with a good payment history will raise your credit score.
Hopefully now you have a better understanding of how your score is comprised. For more information please visit www.myfico.com for tips and strategies on how to improve your score!
Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.
(source: http://www.myfico.com/ ) This material is being provided for information purposes only. Any opinions are those of Matt Trujillo and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
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