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Breaking Down Your FICO Credit Score

Posted March 4, 2013 by Kelley Long in Life After Five
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When someone is talking about their credit score, what they usually mean is their FICO score, which is the standard credit score used in the majority of lending decisions in the US. Your FICO score is meant to represent your ability to repay a loan. There is a lot of misinformation out there about what matters and what doesn’t, so it’s helpful to know how that number is calculated. Your personal score is determined from data in the following five categories:

FICO score breakdown

Most lenders (mortgage companies, auto loan departments, credit card companies) require that you have a certain minimum score to lend you money. Each lender has different requirements and the interest rate you are charged by each is often determined by your score. The higher your FICO score, the lower your interest rate. Why is this? Because a higher FICO score indicates that you are more likely to pay the lender back, making it a lower risk to lend you money. Hence the lower interest rate.

Let’s break down the five categories with ways you can improve each. Keep in mind that negative items can affect your score for up to 7 years. FICO finds this information about you in your credit report.

Payment history: Paying your bills on time is the key to keeping this part of your score high. The bummer about this category is that even one late payment can count against you. How late you were matters as well, so if you miss a due date, try to catch up sooner rather than later.

You know where I have seen the most pain with this category? Old roommate disputes – one roomie put the cable in her name and the other took electric. When they moved out, there was an argument about paying the final bill and the roommate with cable got stuck owing a couple hundred dollars. She let it go because she had moved anyway. Five years later, this is still hurting her score because it’s showing up as a bill she never paid. The only way to fix it? Pay the old bill, which is now over $1,000. Oof.

Amounts owed: This is your credit card balance relative to your available credit, or similar types of revolving credit accounts. Thirty percent is the recommended limit to keep your score up – for example, if your limit is $1,000, try to keep your balance less than $300.

Length of credit history: There’s not a whole lot you can do about this, but this category is where the advice on keeping an old credit card open, even with a zero balance, stems from. The further back you can show that you’ve been exercising responsible financial behavior, the better your score. It’s also worth noting that your card doesn’t have to carry a balance to “count.” It’s the record of payment and how back it goes that matters, not what’s on it.

New credit: Lots of new accounts can hurt your score, so only open accounts when you need them.

Types of credit used: There is such a thing as “good” debt versus “bad” debt. Good debt is when you’ve purchased something that will outlive the life of the debt such as a home, car or education. Bad debt is the opposite – credit card debt falls in this category, since it is assumed that by the time you pay off the balance, the stuff you purchased will be worthless. (think about that the next time you use your card for sushi night then don’t pay the balance in full)

For more information on your FICO score, check out myFICO, which has oodles of tools and information for Career Girls looking to learn more.

Remember, your credit score is based on the information that is contained in your credit history. You should be checking that annually to make sure it is accurate. To obtain your federally-mandated free credit report, visit www.annualcreditreport.com.



About the Author

Kelley Long

Kelley Long is a CPA/PFS and CFP® who believes that the true meaning of financial security means having choices in life. She uses her 15 years of experience in various financial services industry jobs to inform her work as a Resident Financial Planner for Financial Finesse, providing unbiased financial guidance through workplace financial wellness programs. She’s also a volunteer and media ambassador for Feed the Pig and 360 Degrees of Financial Literacy. In Kelley’s perfect world, everyone would feel great talking about their money concerns, fears, questions and problems, because then everyone would see that we ALL have those concerns, fears, questions and problems. Kelley lives in Chicago with her husband and their Himalayan cat Miles, where she also teaches BODYPUMP group fitness classes at the Chicago Athletic Clubs.