Your credit score, also called your FICO score, is calculated by the Fair Isaac Corporation (FICO). FICO is the company that manages credit reporting. This score, which ranges from 300 (awful) to 850 (perfect) and averages from 600 to 700, is becoming more important all the time. These days employers, landlords, and even movile phone companies checking credit scores to evaluate your trustworthiness and reliability.
The actual credit score formula is a closely guarded secret. However, most lenders run thousands of credit reports a week, and they can tell how much weight certain factors have in the scoring. There are five key factors, to be exact.
Factor 1: Your payment history. This is the single highest weighted factor in your credit score, representing 35% of the overall number. Missed payments, collections, foreclosures, and bankruptcies will all reduce your score. The further back they are in history, however, the less weight they carry. After 7 years, they stop affecting your credit altogether.
Factor 2: Your debt to available credit ratio. 30% of your FICO score is comprised in this factor. A good loan candidate will carry no more than 10% of debt on his available credit. This means if you have $50,000 in available credit, you should carry no more than $5,000 in credit card debt.
Factor 3: Your credit longevity is behind 15% of your FICO score. This is the actual chronological history of your accounts. The longer you have had credit card accounts, car loans, mortgages, and other debt notes, the better for this factor.
Factor 4: Inquiry volume on your account. This makes up 10% of your credit score. Those who have frequent hard credit checks will suffer with this factor. Therefore, it is wise not to apply for too many credit cards or take “free” gifts in exchange for getting your credit score. The difference between a credit score of 700 and 640 when taking a 30-year mortgage is currently 0.18%. That might not sound like a lot, but on a $100,000 loan, over the course of 30 years that would cost you $10,000.
Factor 5: The variety of your credit sources. This factor determines 10% of your score, and the more types the better. Mortgages, car loans, revolving credit, and business loans all count toward the health of this score.
Interestingly, your income does not affect your credit score at all! This is a common misconception. FICO measures only your creditworthiness and debt exposure–not the amount of money you make.
