The exact details of how your FICO score will probably never the light of day. Because if these details get into the public domain, there is a chance that people who are too smart will be able to abuse it. This can cause chaos in the financial world. Can you imagine if a serial debtor somehow manages to work the system in his favour and gets approved for a jumbo loan? Now what if there are thousands that implement the exact system to manipulate their credit scores to qualify for big loans which they have no intention of fully repaying? I believe that anyone would agree that that could be catastrophic to the economy.
Actually FICO does not generate the scores themselves. They merely provides the software for the 3 big credit bureaus to generate their own scores. But thankfully there is a general guideline on how information is used and how they are weighted to produce the final result. Here is what goes into a FICO score.
35% based on recent payment history.
You don’t have to sulk if your payments have not been very timely in the past few months. This is because you can easily put that right by starting to make full payments before due dates. This actually makes a lot of sense. For example, a couple of months worth of late payments a year ago is hardly a piece of material information when you have been a good boy in the most recent 12 months.
Another factor is how long payments were late. The longer an overdue bill drags, the deeper it drags your score with it. For example, a different grade could be given for bills that are more than 30 days late compared to one that is more than 60 days late. The difference in damage could compound multiple times as you work your way down the grading.
30% based on debt utilization
A simplified way to calculate utilization is by adding up all the credit limits on all your accounts, and subtract the total amount you owe from it. This can also be easily expressed as a percentage by dividing the total owing with the total limit. The lower your utilization, the better it will be for your FICO score. There is no general agreement of what is a low usage. But 20% and below should be enough to be classified as low.
15% based on the length of your established credit history
The longer you have spent in the books of the bureaus the better. Maybe this is a good reason for youngsters to start young. The specifics of this could include the age of your oldest account and newest account, and how active they have been throughout it’s life. With this in mind, you might want to apply for a card now even if you have no use of it. Because when the time comes where good credit can aid you, it could already be too late for you to do anything about it.
10% based on your mix of credit
This concerns the different flavours of credit facilities you have in your name. A wide variety of different items can mean that you have experience managing all kinds of financial products. These variety can include personal loans, overdrafts, mortgages, trade facilities, study loans, etc. The more diverse your accounts are, the better it is for you.
10% based on new credit inquiries
If there had been many inquiries on your reports, it could be an indication that you are desperately seeking finance as all lenders are rejecting you. Each time you apply for any form of credit facility, the lender would make an inquiry for their own assessment purposes. So when there is a sudden burst of activity, one would wonder what is going on.
Even though harnessing a good FICO score can be especially useful when you need it, be wary of letting it get to your head. Don’t go around signing up for every different product you come across in order to maximize the 10% on mix of credit. That would be ridiculous.