The Big Three credit reporting agencies (Equifax, TransUnion, and Experian) use the same formula to figure out your FICO score or credit score, but they do it on their own. Your score has a big effect on how well you can handle your money. If your credit score goes up by just 40 or 50 points, for example, you could pay hundreds less each month on a 30-year mortgage. Anything you can do to raise your FICO score can literally put money in your pocket.
Fair, Isaac & Company made the FICO score. They keep the exact formula they use to figure out your score under lock and key. But they have told everyone what the 5 main parts of your credit score are and how much weight each one has in the formula. The breakdown is as follows (note that this information can change at any time, so check the Fair, Isaac & Company website or recent press releases for the most up-to-date information):
History of payment: 35%
30 percent of the money is due.
15 percent have had credit for a long time.
10 percent is the new credit.
10 percent of the credit was used for these
Based on these 5 factors, here are some quick tips for keeping each one looking good in the eyes of the Big Three credit reporting agencies:
Payment history: If you've never been late on any of your bills, your payment history should look pretty good. Things like bankruptcies, lawsuits, and wage attachments in your past can lower this part of your score. Stay away from these, as well as late or missed payments, and the payment history part of your credit score will be spotless.
Amounts owed: This part is basically a ratio of how much you owe compared to how much credit you have. Also taken into account is how many credit accounts you have now. For example, if you have several credit cards with a total credit limit of $10,000 but only owe $5,000 on all of them, your ratio is 50%. The ratio should be as low as possible. Credit bureaus want you to have at least a few accounts open to show that you can pay your bills, but they don't want you to have too many accounts open (since that could make you look overextended). Balance is the key here.
Length of credit history: This factor takes into account both the total length of your credit history (how long it's been since you opened your first credit card account or got your first car loan, etc.) and the average length of time your current accounts have been open. When it comes to your FICO score, the longer both of these things are, the better.
If you're trying to build your credit score, don't apply for too many new loans or credit cards at once. Take your time and slowly build up a history of borrowing and paying back each loan over the course of 6 months or a year.
Types of credit used: Your FICO score can improve if you use more than one type of credit. This could be, for example, a mix of revolving credit cards (like MasterCard or Visa), charge cards (like American Express or Discover), instalment debt (like a mortgage or car loan), store charge accounts, etc. Again, having different kinds of credit is only helpful if your balances are low compared to your total credit line (see "Amounts owed" above).
By knowing what the Big 3 credit reporting agencies use to figure out your FICO score, you are on a much more even playing field when it comes to matching your spending habits, payment habits, and types of open instruments with their expectations of what makes a "good" borrower.
