THE INNOVATIVE REPORT » January 7, 2014

Daily Archives: January 7, 2014

Ready to Apply for Financing, but Don’t Know Where to Start? A FICO Score is a Must!

Financing 101, Small Business owners need a Fico score in order to qualify for loans. In simple terms it is a measurement representing the credit-worthiness of a business and the likelihood the entity will pay off debt…….

The FICO® Score is calculated from several different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your FICO Score is calculated.

Your FICO Score considers both positive and negative information in your credit report. Late payments will lower your FICO Score, but establishing or re-establishing a good track record of making payments on time will raise your score.

How a FICO Score breaks down

FICO credit score chart

These percentages are based on the importance of the five categories for the general population. For particular groups—for example, people who have not been using credit long—the relative importance of these categories may be different.

Importance of categories varies per person

Your FICO credit score is calculated based on these five categories. For some groups, the importance of these categories may vary; for example, people who have not been using credit long will be factored differently than those with a longer credit history.

The importance of any one factor in your credit score calculation depends on the overall information in your credit report. For some people, one factor may have a larger impact that it would for someone with a much different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO® Score.

Therefore, it’s impossible to measure the exact impact of a single factor in how your credit score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Score chart are for the general population, and will be different for different credit profiles.

Your FICO Score only looks at information in your credit report

Your credit score is calculated from your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.

What the FICO Score ignores?
What are the minimum requirements to have a FICO Score?
What’s in my credit report?

Payment history (35%)

The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This is one of the most important factors in a FICO® Score.

How is credit score calculated from payment history?

Amounts owed (30%)

Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low FICO® Score.

How is credit score calculated from amount owed?

Length of credit history (15%)

In general, a longer credit history will increase your FICO® Score. However, even people who haven’t been using credit long may have a high FICO Score, depending on how the rest of the credit report looks.

Your FICO Score takes into account:

  • how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts
  • how long specific credit accounts have been established
  • how long it has been since you used certain accounts

Community forums: Calculating Average Account Age

Types of credit in use (10%)

The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.

How is credit score calculated from types of credit in use?

New credit (10%)

Research shows that opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history.

visit www.myfico.com

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Use Credit Cards the Right Way – Improve Your Credit Score

Can you think of someone you know who doesn’t have a credit card? …I can’t! On a daily basis we see more plastic than cash. But that little plastic card can do a lot of damage. Use credit the correct way to grow your score!

An excellent credit score is a sign of responsible financial management. Mortgages, credit cards, auto loans and even cell phone services add depth to an individual’s credit history and can increase a credit score. Scores influence whether a loan or line of credit is approved, the higher the score the better the chance of securing a mortgage, loan or credit card.

One common misunderstanding of establishing excellent credit is that zero balances on credit accounts will earn raise a score. But that’s just not the case. Lenders want to know that you can actually manage your account and, as grand a gesture is of paying off the balance every month, it doesn’t reflect an ability to handle debt. So, even if you have the financial stability to pay the balance off each month, allow one or two accounts to carry a small balance to increase the visibility of responsible money management.

Good credit comes from handling a variety of loans and accounts. It’s impacted by how you handle fixed payments, like your car and mortgage payments. But when it comes to credit cards, there are several points that need to be addressed to help secure a healthy score and history:

Inactive Credit Cards – Should cards that are no longer in use be closed? The simple answer is ‘no’. An inactive card has no negative impact by sitting in a desk drawer; plus, older accounts have more value than new ones. In fact, if you cancel a credit card, you may see a drop in your score because your total credit limit will be reduced… an important factor in determining your credit score. You want to keep your allowable credit as high as possible, which means inactive cards should remain open.

Opening New Accounts – Opening a new credit card account does not have a negative impact on your score – unless you apply too often. Every time you apply for a new credit card or loan, the application generates a hard inquiry on your credit report. Too many inquiries may indicate financial trouble and result in the denial of your application and raise your credit score.

An Important Balancing Act – Carrying a balance on your account is not all bad, unless you are nearing the credit limit. You will see a negative effect on your score, if you max out the balance. You should never use more than 50 percent of your credit limit; a lower percentage is always better. For example, if your credit limit is $2,000, you shouldn’t have a balance of more than $1,000.

Credit Increase: Pro or Con – Asking for an increase on your credit limit may temporarily lower your score. The review process that occurs prior to an increase in your credit line may cause a dip in your score. However, an increase in your credit limit may raise the ratio of available credit to debt and raise your score.

Keep Them Active – Financial experts suggest that consumers use every active account at least once every six months. It only takes a small purchase to keep an account open and maintain the credit limit.

The importance of maintaining credit card debt responsibly cannot be understated. Late or missed payments are an absolute deal breaker when looking to earn an excellent credit rating. More than any other type of loan, credit cards reap the biggest boost to your score when managed well.

Interested in accepting credit cards for your business? Visit our Merchant Services Informational Page >

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