Here is a list of five factors that will explain how the credit bureaus calculate FICO scores and tips to help you improve your credit.
Payment History - How you pay your bills makes up 35 percent of your FICO score. It goes without saying that paying your bills on time will have a positive impact on your credit score, while paying bills late or not at all will have a dramatically negative impact. Even paying one bill late will cause your FICO score to take a hit, so make sure you're paying your bills on time. If you've made mistakes in the past and haven't always paid your bills on time, don't worry. If you change your ways and pay on time, your FICO score will eventually reflect that.
Debt to Income Ratio - The amount of debt you have versus the amount of money you earn makes up another 30 percent of your FICO score. Your debt-to-income ratio (DTI) shouldn't exceed 36 percent. This means that your debt load should not be more than 36 percent of your monthly gross income. If you're looking to improve your credit score, you should work on reducing your debt as much as possible.
Credit History - The length of your credit history makes up 15 percent of your overall FICO score. The credit score formula calculated by FICO will reward a history of using credit wisely. That's why older adults generally have higher credit scores than people in their twenties because they have had credit lines open for a longer period of time.
Credit Applications - The number of credit accounts you apply for has an impact on your credit score as well. This factor makes up 10 percent of your credit score. Applying for many credit cards at one time signals that you are trying to get access to a lot of credit that you may not be able to pay back. You will help improve your credit score by applying for credit only when it's appropriate.Types of Credit - The types of credit accounts makes up the final 10 percent of your credit score. The FICO credit formula weighs your credit accounts differently. For instance, a revolving credit account is weighed differently than an installment loan like a mortgage. Having diverse credit accounts, while maintaining good payment histories, will help increase your credit score in the long run.
