Sunday, February 8, 2009

What Makes Up Your Credit Score?

If you have ever wandered how the credit bureaus come up with your credit score you are not alone. It is one of the more arcane things in shadows of the financial world. You may have heard about how certain actions or behaviors, like being late with a credit card payment or having too many cards in your wallet, can negatively affect scores. But, that's only a small piece of the puzzle.

There is, in fact, a very definitive algorithm that goes into making up a credit score or “Fico” score. Even the term Fico is enigmatic, for that matter. But it actually is just an acronym that stands for “Fair Isaac Company”, the company that originally developed the credit scoring methodology.

While the exact recipe of the credit score is a tightly guarded trade secret, there are some general guidelines that comprise the final numbers. Listed below are the financial behaviors and related factors along with the percentage weighting that each contributes to an overall credit score:

  • 35% - An individual's history of making credit payments on time
  • 30% - The total amount of debt being carried along with available credit
  • 15% - The age of an individual's open credit lines (more history is better)
  • 10% - The frequency with which someone applies for new credit
  • 10% - Wild card factors such as the types of credit lines

In general, most of the factors that influence credit scores are within the power of consumers to change for the better. All it takes is a consistent dose of financial self-discipline to always make payments on time, not carry too much debt on any one credit card, don't close older accounts unless absolutely necessary and use discretion when applying for new credit.

If you are curious about your current credit score, you can obtain a free copy once per calendar year. Simply click here for articles about obtaining your credit report or click here to order your free annual credit report.

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