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What you need to know about your FICO score

Dawn Papandrea

May 6, 2015

You hear a lot about the importance of having a good credit score, but do you really understand how to get one?

By breaking down the components that factor into your score calculation — and learning why lenders and banks care about each one — you can be more strategic about how you you go about building and improving your score.

Before diving into the five main items affecting your FICO credit score, the most commonly used scoring model, you should know that you actually have more than one FICO score. That's because each of the three major credit bureaus (Equifax, Experian and TransUnion) use the FICO algorithm to produce a score based on its unique data set. The bureaus collect data about your credit from lenders for your credit reports, and those are the basis of your scores. Since not all lenders report to all three bureaus, you should expect some minor variations between the scores.

Some lenders will rely on the credit score from one particular bureau, while others will pull all three and use the middle score, says Jerry Linebaugh, founder of JLine Financial, a financial services firm based in Louisiana. Because you never know which score will be pulled when you're applying for a loan, you should monitor all three of your scores periodically, which you can do for about $20 each at MyFICO.com.

That being said, take a look at the basic activities that affect your FICO score, and learn to manage each one:

Payment history
35 percent of your score

The question on most lenders' minds is simple: “If I give you this money, are you going to pay me back?” says Katie Bossler, financial counselor with GreenPath Debt Solutions' Detroit office. That's why the biggest factor of your FICO is your payment track record. “If you are late or miss a payment, that's going to have a negative impact, and it can be serious,” says Bossler.

Worth noting: You're not doomed if you're a day or two late on your credit card bill, says Linebaugh. “If you're a few days late, the creditor will send you a letter and they'll charge you a late fee, but that's not reportable,” he explains. In other words, in order for the credit bureaus to be notified, your payment has to be a full 30 days past due. If you're approaching that possibility, you might be able to avoid having your report and score dinged by reaching out to the creditor. “If you call ahead of time, and say that you're running behind, but you're concerned about protecting your credit, the creditor might not report to the bureau,” says Linebaugh. It might not always work, but if you're proactive and keep your account in good standing otherwise, it's worth a shot.

Amount owed
30 percent

There's a lot of confusion around this element of the FICO score, says Bossler, because many people think that as long as they make payments on their credit cards, their credit is in good standing. However, carrying balances can work against you. “The idea with revolving accounts [such as credit cards] is that you don't want to overuse them. According to FICO, there is no right or wrong number, but the closer you are to having a zero balance, the better for your credit score,” she says.

From a lender's perspective, if you're using almost all of your available credit limit (for instance, you have a $4,500 balance on a $5,000 limit card), it sends a signal that you may be struggling financially. “Low balances on the other hand show that you're using credit for convenience,” says Bossler.

Worth noting: You should aim to keep your debt utilization under 30 percent at all times, says Linebaugh. “Anything above 50 percent, and you start tearing your scores down.” However, if you can pay down your balances and keep them below 30 percent, in six months you should see a measurable increase your FICO score, he says.

Length of credit history
15 percent

Length of credit history is a factor because if you just recently opened up a card or took out a car loan, not enough time has passed to show a consistent record of managing your accounts responsibly, says Bossler. “The longer you've had credit, the more you've proven yourself.”

Worth noting: Establishing your creditworthiness happens over time, so if you're new to credit or are trying to rebuild your credit after a difficult financial period, you shouldn't expect immediate results. If you play your (credit) cards right, though, your credit limits will increase, you are more likely to be approved for new credit, and you'll have access to more favorable rates and terms.

Credit mix
10 percent

It's not enough to show that you can handle having one credit card. To earn a top-tier FICO score, you'll need to demonstrate that you can successfully manage a mix of credit products, such as a car or student loan, a mortgage and at least one card. “The story here is that people tend to value debt differently, so one might be good at paying for their car, but not so good at paying their credit card,” says Bossler.

Worth noting: Other accounts, such as your phone bill or medical bills are not factored into your FICO score unless you don't pay them and they are sent to collections. At that point, they become delinquencies, which is an ugly mark on your credit report and score. In other words, pay all of your bills on time, or they could fudge up your FICO.

New credit
10 percent

When you submit an application for a new credit card, cell phone service or perhaps a new apartment, your credit report most likely will be checked. This is what is called a “hard inquiry” and will temporarily ding your credit score. If you are about to apply for a big loan, such as a car or home loan, you should avoid any unnecessary hard inquiries (other than from the respective auto or mortgage lenders, of course) to keep your FICO score as high as possible. The higher your score, the best interest rates (and lower payments) you will qualify for. “It goes back to can you handle additional credit?” says Bossler. If you keep applying for cards, it signals to creditors that you're struggling financially and have to borrow.

“Low balances show that you're using credit for convenience.”
–Katie Bossler, GreenPath Debt Solutions

Worth noting: If you are in the market for a car or home, don't be afraid to shop around for loans because of what credit score inquiries might do to your score. FICO does not penalize you for multiple score requests from within the same industry within a 30-day period, says Bossler. (That does NOT include credit card applications, however.) Also, pulling your own credit scores does not result in a hard inquiry.

Why the FICO formula matters

Beyond getting the best interest rates on loan products, the FICO score is becoming increasingly significant in other aspects of life, too.

For example, landlords are increasingly checking FICO scores, says Linebaugh.

Once you know where you stand, it's up to you to maximize your FICO score. Check your credit reports once a year at AnnualCreditReport.com for free. Dispute any errors, checking for incorrect addresses, misspelled names or accounts you don't recognize. That can improve your score measurably.

Linebaugh says he recommends a simple formula to his clients: Have one installment line (a car loan, student loan or mortgage), and two revolving credit accounts that you use regularly. Always pay on time, and keep credit cards below a 30 percent utilization at all times. “If you can do that, you'll see the fastest upward movement of scores inside of 12 months possible.”