The most widely used system in calculating individual credit score is the FICO scoring model, which was created by the Fair Isaac Corporation. The FICO score ranges from a low of 300 to a perfect score of 850. Ideally, consumers must aim for a score of 700 and above to be considered as an excellent client. On the contrary, consumers with a FICO score of 600 and below are considered to be “high risk borrowers” and may be offered higher rates or may not get approved at all. What are the specific factors that make up the FICO system?
Factors that Determine Your Credit Score
Payment history.
Payment history makes up 35% of your total score. Too many people think they can “catch up later” or I have even heard the excuse, the payment due was so small I didn’t want to waste the check! Well, not sending them that $3 payment just cost you a big hit on your credit report. Yes, most companies will remove the late for something that small, but they won’t make a habit of it. So if you do this more than once in a year, don’t count on your credit card company helping you out. This is one of the biggest parts of your credit score, even if you only pay the minimum amount due. Make sure you do it on time!
Credit line usage.
How much of your credit limit do you usually use? Financial experts recommend not using more than 30% – 35% of your credit limit. So if you have a credit card with a $1000 limit. Don’t leave more than $300 as a carryover balance. Ideally, you should pay off your credit card debt at the end of each month.
TIP: An old trick we use when we have a client looking for a loan whose credit score is low because of high credit utilization is. We have them call their credit card company and ask for a credit line increase. We would get enough to get them under that 30% utilization and wait for the credit bureaus to update the credit report. Most of the time we will see a big enough score increase that we can get them the loan they want at the best rate possible. Keep in mind when a lender looks at your credit report and notices you are always “maxed out” you will look like a high risk borrower.
Length of credit history.
15% is based on how long you’ve had your credit history. A longer record of credit is an advantage since it shows how good you are in managing accounts and handling debts. This is why students are encouraged to get a student credit card while in college so they can build an early credit history for themselves.
That’s also why its advisable that you should not close old accounts. Even if the interest rate is high. Just use the card once or twice a year so that the credit grantor doesn’t close the account. Don’t carry a balance. As soon as you use the card, pay it. I have a JCPenny card that I have had since I was 18 years old! it’s over 25 years old! I don’t do a lot of shopping there, but I go and buy something at least twice a year. As soon as I get home I go online and make the payment. Since it’s not a card I use routinely, I don’t want to accidentally forget to pay it!
Credit Inquiries.
Each time a lender inquires about your rating, it is reflected in your credit report. 
This is called a hard inquiry. A hard inquiry will cost you just a few points. But those few points can add up quick! And cause a lot of damage to your credit score.
I see this a lot when someone is looking for a car loan. Car dealers want to make a deal and they want to make it while they have you there at the dealership. If you walk out, they know its unlikely that you will return. So when you fill out that credit application at the dealership. The finance guy uses a “shotgun” approach to getting you approved. Meaning he submits it to ALL of their lenders at the same time. The application may go out first to their top lenders, then their average lenders and finally their subprime lenders. It takes minutes. So most people aren’t aware that in the last 5 mins their credit report was hit over 20 times!
Tip #1: I advise all our clients to have financing in place BEFORE they go to the dealership. There are 2 reasons for this:
- You have your financing in place thus avoiding the situation above (Click here for a list of bad credit car loan lenders)
- I was friends w/ a used car salesman for a long time and he advised me that when I go to the dealership I want to negotiate based on the cost of the car. NOT the monthly payment! You will end up paying more. Don’t give them a dollar amount that you can afford each month. Instead, tell them I’m willing to spend up to let’s say $25,000 for a new car.
Tip #2: If you have very bad credit and can’t find a company 
willing to finance you. Look into buying your car from a “buy here pay here lot” these dealers carry their own financing. Don’t be afraid to negotiate with them. And look over the paperwork! Some of them require weekly payments!
Tip #3: I had a client who had successfully removed the inquiries from her credit report by writing on her credit application, I authorize DEALERSHIP X to pull my credit 3 times in order to obtain financing for me. She had the finance manager sign under the statement w/ his name and job title. She then signed under him. Well long story short, they ran it closer to 18 times. She sent a copy of the application to the credit bureaus and advised those inquiries were unauthorized. Experian removed all the inquiries listed and the other 2 removed most the first time and then with her 2nd letter the rest came off.
Tip #4: If you are looking for a credit card, look for credit card companies that use a soft inquiry. A soft inquiry will not affect your credit score.
Just keep this in mind. Too many inquiries send out a negative impression to lenders and will pull down your score.
Types of credit used.
What kinds of account does your credit report show? If you think that having multiple credit cards will increase your score, you are mistaken. What matters most is how well you handle your credit card payments. On the contrary, having at least two or more different accounts in your name such as:
- mortgage loans
- car loans,
- personal loan
- credit card shows
- installment loans
will show your flexibility and capacity to manage your finances.
