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I’ve been thinking a lot about credit lately. Partly it’s because of my sister buying a house and discussing those things with me, but it’s also because there seems to be a rash of commercials about credit scores and mortgage rates lately on late night TV (and unfortunately, I watch a lot of that since my daughter refuses to sleep normal three year old hours…whatever those are).

On one such late night, that commercial with the guy talking about his credit rating being in the 700s came on, and it occurred to me that the number (even though by his tone most anyone can assume he’s fairly proud of it) could mean very little to some people. The fact that his credit score is in the 700s means nothing if you don’t know what it is or what it’s used for. This may be extremely elementary, but I thought we could all stand for a little review. If anything, the research I did was a good refresher for me.

The rating is called a FICO score, and most lenders use it in some form on which they base their approvals. A FICO score is a three digit number usually ranging from 300 to 850. You will have three FICO scores, one for each credit bureau (Equifax, Experian, and Trans Union). A FICO score will be used under several circumstances which, as most assume, includes applying for loans (like your auto loan, a mortgage or a home equity loan). Your FICO scores can also be used in applying for credit cards, renting an apartment or beginning cell phone services.

Credit scores are calculated from a lot of data, but for the most part that information can be grouped into 5 categories. According to myfico.com, the percentages reflect how important each of the five categories are in determining your score.

Payment History 35%
Amounts Owed 30%
Length of Credit History 15%
New Credit 10%
Types of Credit Used 10%

There are some things that are not in your FICO or credit score, although your lender or broker may still take some of these things into account when determining whether or not your loan will go through. Again, according to myfico.com, the following is not in your score:

–Race, religion, national origin, sex and marital status
–Salary, occupation, title, employer, date employed or employment history.
–Where you currently live
–Any interest rate you are currently being charged on a credit card or any other account.
–Any items reported as child or family support obligations or rental agreements
–Consumer requests for your credit report

In the next few posts, there should be more detailed information here about each of the five categories FICO uses. I know it’s not as entertaining as picking out drapes and deciding on microfiber versus leather for the family room furniture, but credit is an important step to getting to the fun stuff.

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