MARTINSVILLE, N.J., June 20, 2016 (GLOBE NEWSWIRE) — When it comes to finance, numbers clearly matter. However, one of the most powerful within the realm of personal finance is a three digit indicator that shows just how worthy of a borrower an individual is – the notorious credit score. We have all heard about it, but what exactly is this and how is it comprised? According to Ken Schapiro of Condor Capital Management, it is a three-digit number that is generated from information collected by credit agencies and paints a picture of how healthy someone’s finances are. By taking a look at this score, lenders have an initial indication on whether or not to extend credit to you for such things as a mortgage or car loan. In addition, if you are approved for credit, your credit score will also be utilized to determine the interest rate that you are charged. Generally speaking, Schapiro says that a good credit score to target is 720 or higher, though all lenders will have different standards to determine what score is optimal for the extension of their services. With so many factors to consider, it is increasingly important to build a strong credit history and work to increase your credit score over time. However, in order to consider ways to increase a credit score, it’s important to know what goes into a credit score is.
The modern credit score was introduced by Fair Isaac Corporation in 1989. Since then, the company has rearranged the components that make up its FICO® score, but ultimately the importance behind the value has not changed. Currently, the score is compiled from data collected by three national credit bureaus: Experian, Equifax, and TransUnion. Once this data is aggregated, the score is calculated through a weighted approach that takes into account your payment history, amounts owed, the length of credit history, type of credit, and any new credit.
Payment History – 35%
At 35% of the total score, the payment history is by far the biggest and most important component. This information includes all payment information, including if you have made payments on time, if you have missed any, and the frequency of past-due payments to your lenders. By looking at a pattern of your payment history, the belief is that future behavior can be predicted.
Amounts Owed – 30%
The next most important constituent in the score is the amounts owed. This is based off of the full amount that is owed and what proportion of available credit you are actually using up. In essence, consistently maxing out your credit cards puts more pressure on your score than keeping a smaller balance – even if you pay both off on time, consistently.
Length of Credit History – 15%
After this, the length of your credit history at 15% is the most important segment. While at first it might seem wiser to not have any debt at all in order to boost your score, that strategy can actually backfire because lenders would not have a history to look at when deciding whether to extend a loan. If there is nothing for them to review, they have to assume the worst.
Type of Credit – 10%
The mix of credit you have shows lenders how well you are able to handle different debt. There are revolving loans like credit cards, for example, and installment loans like auto loans and mortgages. With evidence of both, lenders can be more assured that you can maintain flexibility to pay off either.
New Credit – 10%
Finally, any new credit inquiries are figured into the tail-end of your score. This last category makes up approximately 10% of the whole score and considers the number of credit accounts that you have recently opened. Opening many accounts raises a red flag and indicates to lenders that you may be in financial trouble due to the sudden onset of multiple credit requests.
After examining the above-mentioned categories, FICO utilizes a point-based system to calculate your overall score, which will inevitably be used to determine whether or not you are a healthy creditor for future lending purposes.
On the whole, a credit score is likely be one of the most important numbers in an individual’s life. It will ultimately determine the cost of future purchases, the amount of money that you are allowed to borrow, and the financial opportunities that you may be able to take advantage of. Schapiro notes that lowering your score is very easy to do through a lack of understanding or even apathy, but improving it is a much harder task that requires good habits and discipline. Most negative items will stay on your credit score for several years before being removed, while bankruptcies will affect your credit score for longer time periods. Consequently, monitoring your credit situation and understanding what goes into it can help you raise your score to a healthy and desired level, while securing a strong financial future for you or your family from the perspective of being a borrower.
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Condor Capital Management
Founded in 1988, Condor Capital Management is an employee-owned, SEC-registered investment advisor based in Martinsville, N.J. employing 15 professional and support staff. Since Condor is a fee-only investment management firm, its fees are based on portfolio size, not sales commissions or number of trades. For more information on Condor Capital Management, please visit www.condorcapital.com or call 732-356-7323.