Cracking the Credit Score Code


If you’ve decided to improve your credit score, you need to know how it works to get started. There are many credit score myths that could actually end up hurting your score if you follow them. While there’s dozens of credit score models that vary based on the lender and what you’re applying for, all work similarly to your FICO score. Here’s how a FICO score is calculated:

35% Payment History

The single largest factor in determining your FICO score is payment history, and payment history has the greatest weight in almost any model because everyone you might do business with wants to know if you’ll pay them. The good news is that all you have to do is pay all your bills on time to maximize this component of your score. The bad news is that there’s very little room for error — even a single late payment can send your score plummeting.


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30% Amounts Owed

How much you owe is the next biggest factor. If you’re applying for a loan, lenders are looking at two things — the dollar amount of your current debt and how much of your credit limits you are using. The actual dollar amount plays little to no role in your credit score, but can result in credit being denied if it is high in relation to your income.

For the purposes of calculating your credit score, the percent of your credit limits that you are using is what’s important. If your credit cards are maxed out, lenders become concerned that you may be in financial trouble and unable to pay down your current debts. If you are going to carry a balance, try to keep it at one third of your credit limit or less.

Above one third utilization is where your credit score starts to decline more rapidly as you use more of your credit. If you pay in full, remember that your statement balance is what’s used for credit score purposes — maxing out your card every month and then paying it off will still be counted negatively for this part of your score.

15% Length of Credit History

Having a long credit history also helps your score. A longer history gives lenders more information on how you use credit and your ability to repay them, so you are less risky to them than someone who has used credit the same way over a shorter period of time. Most models consider your active credit cards plus those recently close, but this varies widely.

10% Types of Credit in Use

Having multiple types of credit such as credit cards, bank loans, or a mortgage also increases your FICO score. The idea here is that if other lenders have been willing to extend you credit, they have already confirmed that you are low risk and able to pay.

10% New Credit

For the FICO score model, this component is calculated based on your applications for new credit. Each time you apply for credit, the lender makes an inquiry that is reported on your credit report. A larger number of inquiries in a short period of time are a sign that you may be looking for credit because you are in financial trouble.

Adjustments are automatically made if the inquiries follow a pattern of shopping around, such as looking for the best rate on an auto late. Inquiries have the biggest effect on your score within one year of the credit application and are generally counted for two years.

Gina Wilson

Another post from Gina Wilson – Credit & Loans Specialist Blogger.

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