What Makes Up Your FICO Credit Score?

95% of all financing decisions for individual funding i.e.: Mortgages, Vehicle loans, Credit Cards, etc. are dependent on your FICO credit score. I emphasize “FICO” because all other credit scores as nice BUT really insignificant in the financing world. Your FICO credit score is determined by an algorithm developed by the Fair Isaac Corporation (hence its other name of FICO score). Independent companies, called “credit bureaus”, specialize in collecting and reporting on a person’s financial history. The three prominent credit bureaus are Equifax, Experian and TransUnion. FICO accesses the information from all 3 credit bureaus and calculates your FICO credit score per credit bureau. While, the exact formula used to calculate your credit score is a tightly guarded industry secret, here are general guidelines about financial behavior that can affect your FICO credit score. rnPayment History (35%)rnThirty-five percent of your credit score is made up by your payment history. This includes late payments, collections, and even bankruptcies and tax liens. Each type of account will stay on your credit report a specified period of time and each type of derogatory will hurt your score differently. Debt Ratio (30%)rnYour debt ratio is the amount of revolving credit (i.e. credit cards) you owe in relation to the amount of credit you have available. For instance, if your credit limit is $10,000 and your current balance is $2,000, your debt ratio would be 20%. While, ideally, you should have your debt ratio at 0%, we usually recommend, for day-to-day usage to maintain your debt ratio at 30% or lower. Length of Credit (15%)rnYour length of credit is how long you have had credit. At face value, this seems like something you couldn't really do anything to fix. However, there are ways you can hurt yourself here. If you close out your older credit cards, even if they have higher interest rates, it will hurt your score. The credit scoring model has no memory of credit cards you close: if you close out that fifteen year old card, it could end up hurting your credit score. Types of Credit (10%)rnTypes of credit include revolving, installment and mortgage loans. By having different kinds of credit open, you show creditors that you are responsible and able to handle different types of credit responsibilities. Inquiries (10%)rnInquiries are marked on your credit report when you ask for new credit (i.e. when you apply for a home loan). Inquiries made by yourself or for unsolicited offers do not count against your score, but are shown on your report. It is important to note than when searching for a home mortgage, vehicle loan or education loan you are allowed unlimited inquiries over a 45 day period, since it is assumed you are rate shopping.