Have you ever wondered where banks get the credit score they need to make lending decision for borrowers? Whether you are applying for a credit card or a residential home mortgage; your combined FICO score from will play an important role on the amount of credit and the interest rate.
But banks are not the ones that generate your credit score. There are 3 major credit reporting agencies namely: Experian, TransUnion and Equifax. Each of these 3 companies have their own proprietary algorithms to score each borrower. However, most of them give significant role to :
1) 30-35% of your FICO score is based on consistent payment history. This is important since the banks do not want to loan anyone money if they don’t have a stellar repayment history. So, missing due dates will indeed reduce your credit score.
2) 13-15% of the your credit score is determined by the length of time you have been with a creditors or lender. For instance, if you have a $5,000 credit card that you have been using for 10 years and another one which you just opened with $10,000 limit; the card with lower limit still will have more impact on your FICO. This also means that it’s ill-advised to close your oldest credit cards since they have more influence in improving your credit score.
3) 30-35% of your credit score depends on the ratio of your credit limit and the amount of revolving balance on that credit cards. For instance, if you have a card with $5k limit and you are unable to reduce the balance below $1,500 your score will be impacted adversely. As a general rule, you should not have more than $300 of monthly charges on a card that had a $1,000 limit.
4) 10-15% of your score depends on how frequently your credit history is obtained. We call this a credit inquiry. Each consumer credit inquiry could impact your FICO score by 10 points specially if they are scattered across a period of time. This signals the banks and credit card companies that you are looking to borrow money ALL the time which is not comforting thought for a creditor since they worry that you will fall behind your current obligations.
Some Credit Monitoring Services offer services to help consumers monitor the activity on their credit. However, these service do very little to increase your credit score. You can also Contact Us to get specific recommendations based on your full credit report.