How to Understand FICO Score Calculations

Your FICO score -- a calculation created by the Fair Isaac Corporation to measure your creditworthiness -- is a key component of your financial life. A good FICO score can unlock lower interest rates on your loans and pave your path to a bigger house, a better apartment or even a job. A poor credit score can do the opposite: It brands you as a bad risk. Your credit score is based on some fairly straightforward components, all of which are calculated from information on credit reports compiled by the three main credit reporting agencies -- Experian, Equifax and TransUnion.

Instructions

1

Take your payment history into consideration. The biggest portion -- 35 percent -- of your credit score is based on whether you pay your bills and in a timely manner. Liens, judgements and delinquencies are all a result of not paying bills. They will play a bigger factor in your overall score. Likewise, being diligent in paying your bills will have the largest impact on boosting your score.

2

Take a good look at how much you owe all your creditors. The amount you owe, relative to your credit limits, plays into 30 percent of your FICO score. Even if you pay your bills on time, if your outstanding bills push your credit limits, your credit scores will drop.

3

Think about how long you have had credit. Are you new to the credit game? Do you have a long history of receiving credit? How long have you maintained the credit accounts that you have? A large chunk -- 15 percent -- of your score is based on this information. It would follow that you cant possibly get a credit card today, pay the bill next month and expect a large jump in your FICO Score. It takes time. It also follows that it's a bad idea to cancel old credit cards, even if you don't use them. The longer they have been on your credit reports, the higher your score will rise.

4

Take a look at your credit "portfolio." Here is where 10 percent of your score falls. Is it diverse? Do you have a good balance? Do you have a large amount of one type of credit extended to you? A diverse array of credit types is best.

5

The last step is to look at what is now called your "New Credit." This is the category that takes credit report inquiries into account -- the more you have in a short period of time, whether from prospective landlords and employers or from credit card applications, the lower your score might droop. In other words, signing up for a department store credit card just to get that 10 percent discount at the register may cost you more than you think. Think about the types of new credit accounts you have opened recently and how many. All of these factors make up 10 percent of your score.