Many people are confused by what makes the FICO credit score and some are puzzled as to why they might not have a credit history. Keep in mind that if you have never used credits before, or only used cash for consumer purchases, you will have a blank credit history and no credit score to calculate. However, as soon as you acquire your first credit card, store card, student loan, or a car loan, you commence the building blocks of your financial reputation. You will then have credit history as well as be able to obtain a credit report and a FICO score. Be alarmed if you find a credit history without you using credit, this could be an indication that your identity has been compromised or your credit report is in error. It is critical that you review your credit report at least once each year.

How to

Prior to making any major purchase and definitely prior to buying a car or a house, check your credit FICO score to find out if you need to make any correction, dispute any charges, or repair your credits prior to such purchases. It is easier to make decisions once you fully understand the crossroad of what makes the FICO credit score.

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Payment History

- Payment history or credit payment history accounts for 35% of your score
- It is the most important factor used in the equation
- Measures your ability to make payments on time and exhibit your excellent financial reputation in meeting your debt obligations
  - First item a lender looks at prior to offering you additional credit
- To secure the full percentage, pay your bills in full and on time
- Review your credit documentation to understand what constitutes "payment on time"
  - Some credit card companies require the receipt of the payment by 5:00 pm on the due date to be considered "on time"

Credit Utilization

- Credit utilization or capacity accounts for 30% of your score
- It is the second most important factor used in the equation
- The ratio of the amount of your credit card balance compared to the credit limit available to you
  - Review your credit cards and know your credit limit on each of them
- To secure the full percentage, avoid charging more than 25% - 30% of your credit limit
  - Example
    - If your limit on your VISA is $6,000, do not carry a balance higher than $1,800 if you want the capacity to stay in good standing

Credit Age

- Credit age or the length of credit accounts for 15% of your score
- To secure this percentage, avoid closing accounts or transferring balances to newly opened accounts to reduce the impact of interest charged
  - Make informed decisions on choosing credit cards that you wish to keep for a very long time
  - The longer you keep the same credit cards, the better off your FICO score remains in the long run

Credit Inquiries

- Credit inquiries account for 10% of your score
- There are two types of inquiries:
  - Hard
    - Affect your score and happen each time you complete an application for credit
  - Soft
    - For information only and do not affect your score (such as checking your own FICO score without applying for credit)

Credit Mix

- Credit mix or account mix constitutes 10% of your score
- To secure this percentage, mix your credits between revolving credits such as credit cards or installment credits such as a loan for a car or a mortgage for a house
  - Diversifying your credits helps you keep your FICO score intact since it indicates asset building in addition to consumer purchases

Practice

Now that you know the crossroad of what makes the FICO score, think of paying it forward and discuss your experience with a friend or a family member.

Congratulations! You can move on to Chapter 3. Which financial actions hurt my FICO Credit Score?

To review the full module on the FICO score, click here.