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From LaToya Irby,
Your Guide to Credit / Debt Management.
FREE Newsletter. Sign Up Now!Your credit score is a three-digit number that is used to predict how you will pay your bills. The score ranges from 300-850 and is calculated using your credit history information contained in your credit report. When you make an application for credit, the creditor or lender uses your credit score to quickly make a credit/no-credit decision. This same decision can very well be made by simply viewing your credit report, but the credit score makes decision-making easier and less subjective.

While there are several different versions of the credit score, the most commonly used version is the FICO score. Developed by the Fair Isaac Company, the FICO score is used by many creditors and lenders to decide whether or not to extend credit to you.

Because some parts of your bill-paying history are more important than others, different pieces of your credit history are given different weights in calculating your credit score. Even though the specific equation for coming up with your credit score is proprietary information owned by Fair Isaac, we do know what information is used to calculate your score.

Payment history is 35% of your credit score. Lenders are most concerned about whether or not you pay your bills. The best indictor of this is how you’ve paid your bills in the past. Late payments, collections, and bankruptcies all affect the payment history of your credit score. More recent delinquencies hurt your credit score more than those in the past.

Debt level is 30% of your score. The amount of debt you have in comparison to your credit limits is known as credit utilization. The higher your credit utilization – the closer you are to your limits – the lower your credit score will be. Keep your credit card balances at about 30% of your limit or less.

Length of credit history is 15% of your score. Having a longer credit history is favorable because it gives more information about your spending habits. It’s good to leave open the accounts that you’ve had for a long time.

Inquiries are 10% of your score. Each time you make an application for credit, it’s added to your credit report. Too many applications for credit can mean that you are taking on a lot of debt or that you are in some kind of financial trouble. While inquiries can remain on your credit report for two years, your FICO score calculation only considers those made within a year.

Mix of credit is 10% of your score. Having different kinds of accounts is favorable because it shows that you have experience managing a mix of credit. This isn’t a significant factor in your credit score unless you don’t have much other information on which to base your score. Open new accounts as you need them, not to simply have what seems like a better mix of credit.

Once you know how your credit score is calculated, it is much easier to take the steps to build good credit.