How Is FICO Calculated?

:: Bad Credit Lender columnist : Leslie Collins - 5/2008

How Is FICO Calculated? - Your credit score is your signals your credit worthiness to potential lenders. Your Credit score can be brutal. Credit scores are black and white. Reasons WHY you have a high or low credit score don't matter. Chances are, you have a LOW FICO score if you are reading this...and unfortunately, most people don't become concerned about FICO score until it's too late.

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Here are the major factors on which your FICO score is calculated- think of a pie, each slice varying in size and representing your credit characteristics and profile; The lower your FICO credit score the more risk you are in the "eyes of a lender".

Payment History - 35%

Payment History and Credit Score - This far the most important. This is how well you pay your debts - mortgage, car payment, student loan, credit cards etc..

Payment Histry is super important and carries a lot of weight accoding to Fair Issacs BUT scoring well in this category will not GUARANTEE you a great FICO credit score (over 720). You must do well in the other categories as well.

Amount You Owe - 30%

The grand total you owe on all outstanding credit. This is also called debt to available credit ratio. For example if you have a credit card with a $10,000 limit and owe $8000, your debt to availble credit ratio is 80% - that's high! Shoot for no more than 25% debt to availble credit ratio on any credit card.

Length Of Credit History - 15%

This is the average length of time in months you have had all you accounts open. For example if you have 3 credit cards all opened exactly 5 years ago ( 60 months) your average credit length would be 60 months. If you have 5 credit cards active, 4 opened 5 years ago and 1 opened 12 months ago, your "average length of credit" would be 50.4 months.

60 + 60 + 60 + 60 + 60 + 12 = 252/5.

252/5= 50.4 months

New Credit - 10%

The above example shows how new credit brings the average length of credit factor down. DO NOT open new credit prior to major purchases - it will only lower your credit score.

Types of Credit - 10%

Certain types of credit are weighted more than others. For example if you have high balance student loan it's not as critical as having several credit cards open with high balance. Why, basically a student loan indicates you are looking to improve yourself, earn more money and be financially independent. The same amount owed on a credit card may orginate from impulsive spending - the dollar amount owed can be the same but the rationale is completely different according to the credit bureaus.