You Don’t Need a Degree to Decipher it: How to Understand Your FICO Score

If you’re like most people, you’ll tend to assume that your FICO score is calculated based on your repayment history. While that assumption is true to some degree, there are various other factors that can impact your credit score that often go overlooked.

The key to boosting your credit score is to consider how your individual level of financial responsibility relates to the five factors used by credit reporting agencies to calculate your score. If you’re keen to take some steps to boost your score on your own, you can read about credit repair tips here.

How Your Credit Score is Calculated

In general, the FICO score range is between 300 and 850. People with a higher score tend to have a higher level of financial responsibility, while those with a lower score may have experienced some financial difficulties at some point in their lives.

There are five primary factors that credit reporting agencies use to calculate your score. These are:

Payment history: A massive 35% of your FICO score is based on your payment history. If you regularly pay bills past the due date and have a history of late payments, your payment history will be reflected in your reduced score. You have the opportunity to boost your score by catching up late payments and then setting payment reminders so you always pay future bills on time.

credit score

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Credit Utilization: 30% of your credit score is calculated based on your debt balances as they relate to your available credit limits. If you have several credit cards with outstanding balances that are close to the credit limits, your score will be impacted. You can boost your score by reducing the outstanding balances on credit cards or other types of revolving credit you have.

Length of Credit History: 15% of your FICO score is calculated on the length of your credit history. If you’re aiming at closing some of your old accounts as you repay them, think carefully about keeping the oldest one open. Keep the balance low on the older account and try to repay the amounts you spend in full each month.

New Credit:  10% of your total score is based on the number of new credit inquiries you make. Whenever you submit a credit application to a bank or financial institution, the inquiry is listed on your credit report. The listing remains whether you were approved for the account or not.  Multiple credit applications in a short space of time on a person’s credit report could be a sign of financial difficulty.

Types of Credit: The final 10% of your overall score is based on the types of credit you have. For example, a person with a mortgage loan, a small auto loan, and a credit card with a balance that is repaid in full each month might be considered to have a responsible mix of credit types. By comparison, a person with several credit cards, store cards, unsecured personal loans, or consolidation loans could be a signal of financial trouble.

Take some time to consider how each of the different factors involved in calculating your credit score could be affecting you. Even if you always pay your bills on time, there are other factors that could drag your score down. The key to improving a bad credit score is to work on taking control of your finances and managing your debts responsibly.


Arnel Ariate is the webmaster of Money Soldiers.

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