How They Come Up with Your Credit Score

Your credit or FICO (Fair Issac & Company) score is a number ranging from 300-900 that can determine anything from your chances of approval for a bank loan to the interest on your car payments. While most people believe that their credit report is what is really important, the truth is that there are often too many details on your credit report, making it a grueling task for companies to analyze the entire document. Your credit score tells a company all it needs to know about your credit history, and what is most convenient for them is that it contains only three digits. Individuals with good credit (750+) are known for paying their bills on time, staying under their maximum credit line, and possessing a long history of established credit. These characteristics are highly attractive to companies making decisions on who they grant loans to. To further clarify matters on how your credit score is arrived at, I will attempt to summarize the main components that are factored into the equation when calculating your score.

Payment History 35%

Making up the largest chunk of your credit score, your payment history depends largely on whether or not you have made your payments on time. Lenders look for individuals that have little to no missed payments. Your score decreases with every transgression.

Amount Owed 30%

This is the percentage of your credit line that you have used up. If you have a credit limit of $5000 on your Visa, try not to charge more than $2500 in any one month. Using more than 50% of your credit line or even worse, maxing out your credit, can decrease your credit score. This shows lenders that you do not know how to manage your finances responsibly. The keyword here is moderation.

Length of Credit History 15%

Your credit report includes a list of all the credit accounts you have ever opened. The older any one credit account is, the more valuable it becomes to your credit score formulation. If you decide to close a credit card account, close the newest one first. Assuming your payment history is good with a certain account, a long credit history shows stability and reliability, two traits every company values in a debtor.

Credit report Inquiries 10%

The more inquiries you have on your credit report, the worse it is for your credit score. This is the reason you should not apply for an excessive number of credit cards. (This is especially true if you are only doing it for the free gifts. That free mug may be costing you more than you think.) The increased number of inquiries indicates to a company that you are in desperate need of money, and while you may be in a hurry to obtain a loan, they are certainly in no hurry to grant you one.

Types of credit currently used 10%

This factor takes into consideration the different types of credit accounts you may have. There is no special combination of credit accounts that will improve your credit score, although it is generally agreed upon that a moderately diverse credit profile will fare better than one limited to only credit cards or bank loans.

If you would like to see your credit score, FICO.com offers to sell you your credit reports from the three main credit companies: Experian, Equifax, and TransUnion in addition to your credit score by FICO for $44.85. The site also offers profile specific advice on how to improve your credit score and the ability to continuously monitor your credit score and reports. All this, of course, comes with an added price. Personal advice on how to improve your credit score comes with the basic package (3 reports and your FICO score) for the price of $49.95. Score Watch, the feature that allows you to continuously monitor your credit score, requires a monthly subscription fee of $7.95 per month.

Whether you are buying a new car or financing your first home, your credit score is the first piece of information your creditors will look at. It only takes a few bad decisions to ruin your credit score. Fortunately, when calculating credit scores, your recent activity will be assigned more importance than older records. If you have cleaned up your act within the last 6 months, it is likely that your credit score may have also improved significantly.