What makes up the FICO score

Something very important I have learned over the last few weeks of reading and researching is how exactly your FICO score is calculated.  Knowing this can help you to work on the most important parts of your credit to get the fastest results, and later what you need to do to tweak things and get an even higher score when all things are positive.

Here is what makes up the FICO score, and how many points it adds.

You start at 350 points

35% (or 175 points) is 'payment history'

30% (or 150 points) is 'amounts owed'

15% (or 75 points) is 'length of credit history'

10% (or 50 points) is 'new credit'

10% (or 50 points) is 'types of credit'

Total - 100% or 500 points

Lets break this down:

Payment History counts as 35% of your score.  Any 30, 60, 90 day lates or charge offs will erode that 35% very quickly.  You want to make sure that payment history is clean and clear.  The longer time goes since a bad payment history makes it effect your score less, but it still effects it heavily.  If you have 30, 60, and 90 day late payments on an account you will want to send a "goodwill letter" asking the company to remove these late payments out of the kindness of their hearts.  It does not always work, but its worth a try.  Any charge offs you have you want to settle so that the account shows "paid in full" or "paid and closed".  When settling this charge off debt you want to contract with the company so they either remove the whole trade line or at least make sure the account shows correctly and the history is clean.

Amount Owed counts as 30% of your score.  This does not mean that if you have a million dollars in debt you will have a bad score.  It is all relative of how much your credit limits are.  For installment accounts and revolving accounts the closest your totals owed are to 10% of your available credit the better.  In fact if you can get your totals between 0-10% you will score the highest in this category.

Length of credit history counts as 15% of your score.  This means the average age of your accounts.  So if you have one credit card for 20 years, and 2 new ones less than a year, they are going to take the average, or 6.6 years, as your average account age.  The longer the better.  So do not be surprised if you open a new credit card, or buy a new car, and find your score drops.

New credit and inquiries count as 10% of your score.  Having tons of inquiries with no new credit will effect you negatively.  The good news is that if you try to get a loan for a car or home, and your credit is shopped around a lot, as long as its within a short period of time all of those inquiries will only count as one inquiry.  But if you apply for a bunch of store or credit cards trying to get credit you could be lowering your score by a lot.  Your best bet is to get a copy of your latest credit report and FICO scores before applying for any credit and take that into where you will be applying.  Most places can give you a "soft approval" based on that without pulling your credit, allowing you to have an answer before officially pulling your credit.

Types of credit counts for 10% of your score.  The FICO system wants to see variety.  They want to see you can handle responsibility over a wide variety of accounts.  To maximize this you should have a revolving account (credit card with a limit), an installment loan (initial balance paid off a little each month), a mortgage note, and a car note.

Maximizing every aspect of these sections will help to give you a score in the high 700's or more.