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What makes up a FICO score?

Posted by mandyf on April 30, 2012

Most people know what a FICO score as well as what it is used for, but they have little or no idea how an actual FICO score is calculated. It is not their fault, the formula for calculating a FICO score is almost as well guarded as the formula for Coca-Cola or KFC’S  eleven herbs and spices. While the entire formula is not known as it is a proprietary secret, there is some knowledge of the components used to calculate it which can be of tremendous help for all consumers.

 Because FICO is the alpha dog in the credit score world and is used to help make somewhere in the range of an estimated 10 billion financial decisions each year it is silly to not learn as much about it as possible. In a broad sense a FICO score is comprised of five key factors that are weighted in proportion to order of importance. What those components are and the weight they are given is something that FICO is willing to share with consumers.

The biggest factor in the equation is your payment history. Payment history accounts for 35% of an individual’s total credit score. FICO tracks revolving credit and installment loans to see if consistent on time payments are made. How slow payments and defaults are weighed against on time payments is not known.

The second factor is the amount of debt you carry which accounts for 30% of the FICO score. This factor considers the amount of total outstanding debt a consumer has in both revolving and installment borrowing plans.  Consumers that are regularly at or near their maximum credit limits are tagged as being consumers that cannot manage debt responsibly. While there is no hard and fast rule concerning what the exact perfect debt to available credit ratio is, a consumer that consistently uses less that 30% of their total available credit line is considered a safer risk and receives a higher rating in this area.

Your length of credit history accounts for 15% of the FICO score. This simply measures the length of time you have had each credit account open and the length of time since the most recent activity on each. New credit consumers cannot have a perfect score because they have insufficient history. Those with a good credit history need to maintain some activity to stay at or raise their score.

The last two components each account for 10% of the FICO score and are New Credit and credit mix. Credit mix is vague but according to analysts what this means is that a borrower can take on a variety of credit and repay them all successfully. New credit is not just a matter of taking out new lines of credit because they are available, it is a matter of why new credit is take and whether doing so makes financial sense.

By knowing each of these components and how they are used to help determine a FICO score, credit consumers can be proactive in not only maintaining credit, but establishing, raising, and to some degree helping repair credit that has been damaged.


3 Responses to “What makes up a FICO score?”

  1. Tom Laing said

    Reblogged this on Laitom’s Blog.

  2. Tom Laing said

    Reblogged to Laitom’s blog

  3. sallykwitt said

    Then they change the rules without telling anyone, so much fun! The good thing is that our scores bounce back up. You just have to do the right activities. Good post.

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