credit score breakdown

"Figure Out How the FICO Credit Score is Calculated And Use That Towards Your Advantage To Improve Your Credit Score or Simply To Keep It Up!"

Ways To Improve Your Credit Score: Part 3 of 4

« Read Part 2: Credit Score Meaning

The FICO Score formula, created by the Fair Isaac Corporation, is proprietary information, so it’s not unveiled to the public. But it’s not a complete secret. This article was written based on a variety of information found online. So, some of the values may be a bit different from what’s actually used, but they are reasonable guesses and will help you to get an idea of how the FICO score is calculated.

By knowing what’s factored into your FICO score, you are another step closer to knowing how to improve your credit score. And at the very least it’ll help you take measures to make sure it doesn’t get lower.

The basic formula provided by FICO is broken down into five parts and how much they weigh towards your score:

  • Payment History – 35%
  • Credit Utilization – 30%
  • Length of Credit History – 15%
  • Types of Credit Used – 10%
  • Recent Search for Credit – 10%

Keep in mind the range of the FICO score is 300 to 850. This means you can’t get a FICO score lower than a 300 and the highest score credit score would be 850. So, you’re really working with a range of 550 points (850 – 300 = 550).

From this point on, these are all just reasonable assumptions.

  • Payment History – In a nutshell, this is the record of how good or bad you’ve been at paying your bills on time. Since this is 35% of your total points, you can get a maximum of about 192 points. It won’t make sense to give a person all these points from the start, if it wasn’t earned. It also wouldn’t be fair to start at zero. So this calculation will start in the middle, around 96 points. For payments made on time, you will gain points, while each late payment will cause your score to drop; the more recent, the harder the hit. The exact points that can be added or subtracted aren’t known.
  • Credit Utilization – Keep in mind this part is worth 30%, so the most you can get is 165 points. This is a simple ratio of how much credit you have available versus how much credit you have been provided multiplied by the maximum amount of points. For example, if you have a total of four (4) credit cards that has a credit limit of $2,500 each, that means you have a total credit line of $10,000 (4 x $2,500). If you only use $1,000 across all your cards, then you’re only utilizing 10 percent of your credit limit, which also means you still have 90% ($9,000/$10,000) left. Using this example, you would get about 149 points (165 x .90).

    This is why it’s best not to close your old unused credit card accounts. Because if you do, then it will decrease your total credit line and lower your utilization percentage.

  • Length of Credit History -This part can get you a maximum of about 83 (550 x .15) points. This is a simple one. It’s how long you’ve had credit history. I’ve heard you can’t really get the full points until 40 years (or more) from the first day you start your line of credit. It may even be longer. But overall, this tells you that you should establish a line of credit as soon as possible, but be responsible! This part of the formula is also why it’s nearly impossible to get a perfect credit score.
  • Types of Credit Used – Total points you can get here is 55 (550 x .10) points. Lenders like to know that you have a good mix of credit types. This displays responsibility as well as money management. But keep in mind there are differences between good and bad types of credit. An example of a good credit type would be a mortgage from someone like Quicken Loans. While an example of bad credit types are consumer finance loans, such as from 100DayLoans. This is not to say that consumer finance loans are bad, but the interest rates tend to be higher. And realistically, sometimes it’s what you need to stay afloat or out of trouble.
  • Recent Search for Credit – Like the “Types of Credit Used,” you can get a max of 55 points here as well. You would start with your full 55 points, but each “hard inquiry” (versus a “soft inquiry”) on your credit report will cause your points to be subtracted. An example of a “hard inquiry” would be the check done when you apply for a new credit card. Put your nerves at some ease though, I’ve heard that inquires for mortgages and car loans don’t have much of an impact.

So there you have it. This is the shortest explanation I can provide that has the most depth. I hope you found it helpful.

As you can see, getting a perfect credit score is (nearly) impossible. If you have a perfect credit score, then I would love to hear from you. If you don’t know your credit score, then I highly recommend getting your credit score as soon as possible. You may be surprised at what you discover. Tip: there are free credit score offers available.

Read Part 4: 5 Best Ways to Raise Credit Score »

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