Many of your financial investments depend greatly on one small three-digit number. Your FICO score dictates what kind of loans you receive and ultimately the purchase you can handle. It is important to be cognizant of your FICO score and know whether you need to make improvements to your credit.
What is a FICO score?
The National Association of Realtors noted that a FICO score determines your creditworthiness and it ranges between 300 and 850. Lenders consider borrowers with lower scores to be at a higher risk and those with higher scores to be at a lower risk. NerdWallet noted that your interest will correlate with your FICO score. Keeping your credit score high will save you money in the long run.
To determine how your credit score compares, speak with your financial adviser and know what is considered to be a good or bad score. Experian, a credit information service company, released its fifth annual credit study and 2014 showed the national average credit score increased two points from 664.
How is a credit score calculated?
The scoring model used by most lenders to determine your creditworthiness was developed by the Fair Isaac Corporation. There are a number of types of credit scores, but NAR reported most lenders prefer referencing FICO scores before providing a loan.
According to MyFICO, the scoring model uses five different categories to calculate a score. These include:
- Types of credit used
- New credit
- Length of credit history
- Amounts owed
- Payment history
The types of credit used only accounts for 10 percent of how your FICO score is calculated while payment history makes a much larger and profound impact at 35 percent. Knowing which elements have the most profound effect on your score is important – especially when you want to improve your creditworthiness.
MyFICO also noted that your scores are not contingent upon your age, salary, current interest rates or whether you are enrolled in credit counseling.
Where is your score relevant?
When submitting a loan application, your credit score is always at the forefront of a lender's mind. Given that creditworthiness determines how likely you are to pay back your loans, a good score is incredibly important when applying for a loan of any sort. Whether you are trying to obtain an auto or home loan, your FICO score can make or break you.
Freddie Mac reported that your credit is one of the most important and necessary elements of applying for a home mortgage.
What other factors may lead to a rejected loan application?
Opening multiple lines of credit and cosigning history are two additional elements lenders could potentially view as red flags, according to Bankrate.
Signing up for multiple credit cards in a short amount of time could alarm some lenders.
"That would raise some questions," said Norm Magnuson, the vice president of public affairs for the Consumer Data Industry Association. "It could be an indicator of something that's going on. I don't think it's in the best interest of any consumer to go out there and be a collector of credit lines."
Cosigning is an additional factor that could impact whether you are approved for a loan. While you may not have to pay money when you help someone become approved for a loan, you may pay in other ways. When you cosign, you are also taking on that individual's line of credit. If he or she does not have a good credit score, that can now be associated with your own creditworthiness.
In addition, if the individual you cosigned for decided not to make payments or turned them in late, these behaviors would count against you.