Some Credit Score Basics

Do you know how your credit score is calculated?

I am amazed at the number of people I talk to that do not understand that the calculation of your credit score is more than just paying your bills on time.

While that is certainly a major part of your score, there are 4 other factors that you need to keep in mind in order to maintain the best credit score possible.

There are several scoring calculators out there but the one that is the most utilized is the FICO score. The Fair Isaac Company, FICO for short, has only in the past few years released the parameters that they use when calculating the ‘FICO’ score. This number is used to decide your credit worthiness when you are applying for loans of any kind, so use this acronym to remember the five parts of your credit score:

L -  Late payments – ALWAYS PAY ON TIME

O – Owed vs. Credit Limits – KEEP THIS AT 35% OR LESS

A – Average age of all your credit cards – DON’T CLOSE

      OLD CARDS

N – New applications for credit – NO MORE THAN ONE

      EVERY 4-6 MONTHS

S – Spread – KEEP A GOOD SPREAD OF TYPES OF CREDIT

 

Okay, so I was reaching for that last one, but the idea there is to have both revolving (credit cards) and installment (mortgage or car loans). I don’t mean that you should go out and buy a house or car just to get an installment loan, only that the FICO algorithm does take that into account. The stability implied by these types of loans makes you look more reliable.

The first two categories above (L & O) account for 65% of your score.

Building credit takes a long time but you can ruin it quite quickly so keep the above factors in mind the next time you are tempted to pay late or run up that credit card to its limit.

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