Your Fico Score - How it is Comprised

We hear about the importance of the FICO scores. We hear about how our score can get in our way of getting loans. We also know that this number determines the interest rate that we receive. Over a 30-year mortgage, this ends up being the difference between tens--or hundreds--of thousands of dollars. In short, you want your FICO score to be as high as possible so, in turn, your interest rate can be as low as possible.

HOW A FICO SCORE IS CALCULATED

FICO scores are calculated by Fair Isaacs & Co. Scores that are above 720 are considered excellent. The majority of Americans have scores in the 600-700 range. So, exactly how does Fair Isaacs come up with your FICO score? They take into account the following areas. I have also included the percentage of how much weight each area holds in determining your credit score.

• Payment History (35%) -- It is vitally important to pay your bills on time. Late payments, accounts sent to creditors, bankruptcies. These all effect the payment history section.. You need to pay your bills on time.
• Amounts Owed (30%) -- How much money do you owe on the credit that you already have? I remember hearing the financial guru Suze Orman stating that you should not use more that 30% of your available limits on your credit cards. Very important to makes sure that you do not max out card after card.
• Types of Credit in Use (10%) -- It is important to have a variety of types of credit: credit cards, car loans, home loans, school loans. This shows the good people at Fair Isaacs that you can successfully handle different types of loans.
• Length of Credit History (15%) -- It is important to have a track record. Although, make sure your track record does not have any negative marks (collection agencies, accounts in default, or bankruptcies).

• New Credit (10%) -- The new credit that you apply for also affects your score. Don't run around town one day account after account. This will not look favorably credit report.

WHAT THIS MEANS FOR YOU

You should pay attention to your score. Although this score is the most widely known of all credit scores, each of the three major reporting agencies also have their own scores that they use. If you follow the above template and use it responsibly, you should receive favorable scores from each of the other bureaus, too.

It is important to know what these terms mean in order to become as financially literate as you can be. You will end up saving thousands and thousands of dollars over the life of any loan you have IF your score his high. Remember, high FICO score means low interest rates.

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