How to Understand the Breakdown of a FICO or Credit Score

Knowing what makes up your credit score, also known as a FICO score, can help you determine what situations can cause it to go up and down. Here is what I've found listed as the breakdown of a credit score on www.myfico.com:

A credit score is currently made up of five components:

1) Payment History: 35% (This usually goes back between 7-10 years on your report; score drops if you pay late, quit paying, have a bankruptcy or foreclosure.)

2) Capacity (Amount You Owe): 30%

3) Length of Credit History: 15% (Includes unused accounts.)

4) Types of Credit: 10% (Mortgages, credit cards, student loans, etc.)

5) New Credit: 10% (Inquiries and requests for more credit.)

Ethically, if you have credit you should pay things on time and should automatically have a good score because of this.

If there is inaccurate information on your credit bureau, you do have the ability to call the reporting company and have it fixed within a certain time frame.

Companies that claim they can "fix" your credit for a fee however are scams. Time is really the only other thing that will clean a bad score up if a person makes good with past mistakes.

Another thing to realize is that the FICO should never be used as a pulse for your overall financial health, though it's often portrayed that way.

I've known people who would be to the point of bragging about their "great" credit score, but they're just barely keeping their head above water when it comes to debt in comparison to their income. To have a great credit score for a long period of time, you have to stay in debt. That's just the nature of how it's measured at this point, and income and wealth aren't even factors in it.

Obviously, there's no reason to mess up your score on purpose if you already have debt.

Honor your word and pay your debts. However, don't stay in debt for the sole purpose of having a high score. Remember that debt is a product, and sometimes it's more in the banks' interests than it is yours for you to have a high FICO your whole life. It's something you should at least consider when it comes to your financial decision-making. It's more important to have an overall game plan than to let any single piece of information rule all of your finances.

More Tips:

• Sometimes people are surprised to learn that many wealthy people out there have a FICO score of 0, and not just because they were born rich. Some got out of debt (or never got in) and gradually lost their scores over time. They also took the money an average person pays out in interest payments and invested it for their own families. This is short-term sacrifice for long-term gain. It's just debt is so highly marketed that the FICO has taken on almost an emotional attachment to it for some people. This can do more harm than good if taken to extremes.