FICO Formula

On my bucket list one of my goals is to improve my credit score by 100 points.  Well to be able to do that you have to know what your credit or FICO score is made up of.  I thought I would share some recently gained knowledge to everyone to see if there is anything you can do to improve your score as well.

Did you know your FICO score is determined by the following percentages:

35%-Record of paying  your bills on time
30%-Total balance on your credit cards and other loans compared to your total credit limit
15%-Length of credit history
10%-New accounts and recent applications for credit
10%-Mix of credit cards and loans

Since there is so much conflicting advice on how to improve your FICO score you only really need to focus on the five things that really matter.  Focus on the five things that matter,  in order of importance.

*Pay on Time

Your track record in making timely payments accounts for 35 percent of your FICO score.  All that is required is that you pay the minimum balance due on time.  That shows that you are responsible.  The longer you manage to be on time, the better your FICO score will be. 

Now let’s review what qualifies as “on time”.  Writing the check on the date it is due is not on time.  Nor is sending it in three days late but backdating the check.  Cute just doesn’t cut it. 

*Manage Your Debt to Credit Limit Ratio

Next you need to see if you can reduce your debt-to-credit-limit ratio.  Your debt is the combined balances on all of your various credit cards and installment loans-the sum of what you owe.  Your credit limit is the combined total of the maximum amount each credit card company is willing to let you charge.  This calculation plays a big part in determining 30 percent of  your score.  (Included along with that calculation is whether you carry balances on other accounts, and how much debt you have left on loans such as a mortgage or car loan, compared to the original amount borrowed.)

One way to get this ratio down is to pay down what you owe, but many people may not have the extra cash sitting around.  No problem; just get a little creative.  If you are sure you have the resolve to behave responsibly, you can ask the card companies to boost your credit limit.  You will lower your debt-to-credit-limit ratio and this helps your FICO score.

The obvious risk with this is that you will be tempted to spend more monthly because of your higher credit limit.  You have to decide what is more important-a new outfit or a higher FICO score so you can spend less on credit card interest and loans.

*Protect Your Credit History

About 15 percent of your score is based on how long a credit history you have.  The longer your history, the more “data points” the Fair Isaac folks have in figuring out your money-management habits.  That makes them more comfortable in sizing you up.

Cancelling a card after you have paid it off can actually hurt you more than help you because you have just wiped out some important credit history.  Moreover, canceling a card is also going to affect your debt-to-credit-limit ratio, because you have reduced your “available credit”.  So here’s the deal: Be careful before you cancel a card.  If it has a long history, opt for keeping it.  If you’re worried about the temptation of using it, simply take a pair of scissors and cut it up.  If you do decide for whatever reason that you want to cancel multiple cards, cancel just one at a time; give it at least a month to be picked up by the credit bureaus, and then see how it affects your score.  Then proceed with the next card.  And always cancel the newest card first; you want to protect your cards with the longest history.

*Create the Right Credit Mix (the last two combined)

The final 20 percent of your score is split between your “new credit” activity and your general mix of cards.  Nothing too shocking there: Don’t apply for a lot of credit card or loans all at once.  It makes the lenders nervous when they see that you are increasing your ability to build up debt.  At the same time, lenders always want to see a good mix of credit cards, retail cards, and installment loans, such as car loans or home mortgages, where you make monthly payments for a fixed amount and for a finite period of time.  Your ability to juggle those different responsibilities is a measure of your credit-ability.  But be careful here.  Don’t  say yes to every store that offers you its own credit card.  If you have one retail card, great.  No need to have three or four-especially if you are going to apply for a loan anytime soon.

So now that you know (and knowing is half the battle GI Joe…) what can make the most impact on your score you can implement a plan of attack.  I know I have mine already worked out.  I will keep you posted, as usual.