How your credit score is calculated

 keep in mind that recent late payments and collections within two years have a 24.5% impact on your score.

There are five factors that determine your credit score.

FACTOR #1: Account Utilization Rate (30% of Your FICO Calculation)

30% of your credit score calculation is based on keeping the balances on your revolving and installment accounts low, if possible

30% of the account’s credit limit. This is critical! You could potentially see a great increase in your credit score in only 30

days. You will see an even greater improvement in your credit score if your utilization rate falls below 10%, but it is not

necessary. Credit Cards and other revolving accounts comprise the bulk of this calculation, so I want you to focus on optimizing

these accounts.

FACTOR #2: Account Age (15% of Your FICO Calculation)

The FICO calculation issues a better score to people whose accounts have been open for a long time. An average age is use for all
your accounts. That means every time you open a new account, the average age is reduced and you will see a drop in your credit score.

FACTOR #3: Credit Mix (10% of Your FICO Calculation)

The number of accounts that gives you the highest score possible within this factor. The FICO calculation issues a better score to individuals who have the following types of accounts open and current:

• 3 Major Credit Cards

• 1 Installment Account (a loan with personal property as collateral, like a car loan, appliance loan, etc)

• 1 Mortgage (home loan)

NOTE: If you already have 5 or even 10 accounts open, do not close any of them to match the above. Closing the accounts will damage your score, as you just learned in factor #2, because your average account age will decline. Just make sure you have at least the accounts shown above.

FACTOR #4: New Credit (10% of Your FICO Calculation)

Factor # 4 is referring to credit inquiries. When you apply for a new loan, that inquiry stays on your credit report for 2 years and affects your credit score for 1 year. The exception to this is car and home loan inquiries. FICO gives you 45 days of unlimited home loan and car loan credit pulls and it only counts the first one.

FACTOR #5: Payment History (35% of Your FICO Calculation)

Consider the factors above whenever making decision about your personal finance. Having good credit doesn’t happen by luck. It requires hard  work. Understanding the credit scoring world will help you keep a good credit  score for the rest of your life.