You've probably heard of the mysterious FICO score. This is the mystical score that creditors and lenders talk about in regards to credit approval. What exactly is this score and how is it calculated?
The FICO score is named after the Fair Isaac Corporation who developed the score. It is a three digit number that dictates your credit worthiness. The score can range from 300 to 850 and is used by each of the three major credit bureaus - Experian, Equifax, and TranUnion - as the credit scoring method.
The exact calculation that is used to come up with the FICO score is owned by the Fair Isaac Corporation. Here are the components of your credit history that are used in calculating your score. A positive credit score can save you thousands of dollars per year. If you are struggling with your credit score, we invite you to try our
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Payment History - 35%
It makes since that your payment history would be a major component of your credit score since lenders want to see how timely you pay your bills. This part of your score is affected by late payments, collections, and bankruptcies. The most recent negative activity has a worse effect on your score.
Credit Utilization - 30%
This is the amount that you currently owe versus your credit limit. If you have your credit cards maxed out it will lower your score. Having credit card balances less than 30% of the limit is a good rule of thumb.
Age of History - 15%
The longer you've had credit the better is looks for you because it allows lenders to better predict what your future credit actions might look like.
Mix of Accounts - 10%
The type of accounts you have is important. While there is no perfect formula for the kinds of credit accounts you should have, it is good to have loans as well as revolving credit. This part of your score will come into play more when you don't have a lot of other information in your credit report.
Inquiries - 10%
Applying for a lot of credit cards or loans in a short period of time creates multiple inquiries on your credit report. To a lender, this could look like you are taking on a lot of debt or you are in financial trouble. Neither of which is desirable from a lenders point of view. Inquiries that are more recent have more of an effect on your credit score.
If you are looking for ways to improve your credit score, these five areas are the ones for you to focus on.
