Credit Repair: Know The 5 Ingredients of a Credit Score

By Barbara Marquand
Mortgage Credit Problems Columnist

If you've been searching for bad credit loans, you know your credit score plays a big role in whether you quality and how much you pay in interest on a debt consolidation loan, home refinancing, or an FHA loan to buy your home.

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But what goes into your score and how much does each item count? The exact recipe varies by person and the credit scoring model used. But here's an average breakdown of the ingredients in a FICO credit score, the most commonly used credit-rating tool.

1. Your Bill-Paying History, 35 Percent

This includes payment information on various types of accounts, such as credit cards, retail accounts, installment loans, and mortgages. Late payments and actions taken against you, such as suits, judgments, bankruptcy, liens and wage attachments, count against you. In general, recent actions count more than events from several years ago, and a severe delinquency dents your score more than a slightly late payment. On-time payments count in your favor.

Credit Card Debt: Why You Should Pay it Down

2. How Much You Owe, 30 Percent

Among items considered are the number of accounts you have with balances, how much you owe on each, the proportion of credit lines used and the proportion of installment loans still owed. Here's why paying down credit card debt is important: Your score gains points if you use less of your available credit.

3. Credit History Length, 15 Percent

This is the time since accounts were opened and used. The longer your credit history, the better your score, so if you have to close a credit card account, close the newest one.

4. New Credit, 10 Percent

FICO considers the number of recent account openings and credit inquiries, the time since those actions took place, and the proportion of your accounts that are new. Too many credit inquiries and account openings all at once raises a red flag.

5. Types of Credit, 10 Percent

This takes into account the number of different types of accounts you have. Lenders like to see a mix of credit, such as installment loans and revolving credit accounts.

Keep these five ingredients in mind as you embark on credit repair. Improving your credit score could save you thousands of dollars. FICO says a 100-point difference in your FICO credit score could mean $40,000 in extra interest payments over the life of a $300,000 30-year mortgage. To learn what rates you qualify for, enter your information on the form on this page.



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