FICO scoring is used by lenders to figure out what your interest rate will be on loans you apply for. If you’re buying a house the types of mortgages available to you are based on your personal credit score.

The score is based on the Fair Isaac Company (hence, the name FICO) and the interest that you will pay. It also takes into account your monthly payment, which is based on your personal credit also.

The same is true when you get a car loan, as well as the premium on your car insurance or homeowners insurance. Your personal credit score can even affect your chances of getting new employment.

FICO scoring is calculated from a multitude of different credit data and it is grouped into five different categories.

In each category, we will include a percentage that reflects the importance of each when determining personal credit and calculating a score.

History (35%)

Your payment history is the largest factor in determining FICO scoring. This includes the number of unpaid bills you have, any bills sent to collection, bankruptcies etc. The more recent the problem, the lower your score.

Debt (30%)

Your debt is determined by how much of a revolving line of credit you are currently using. If you have a CC with a credit limit of $100,000, the ideal place to be is a balance of $40,000. This sounds odd but $40,000 shows that you are using credit but that you are keeping it well within your means. Same goes for a car loan. Pay off 60% as fast as you can.

Credit History (15%)

This one surprised me. Just length of history. How long have you had an open credit line. If you have a large credit limit and it has been paid as agreed over a long period of time, this will work the best. Close your old accounts if they are having a negative affect on you.

Inquiries (10%)

Every time you apply for any kind of credit you create an inquiry on your credit report. A lot of inquiries negatively affect your credit score. However, ordering a copy and checking your own credit report or personal credit score counts as a soft inquiry and does not go against your score.

Type of Credit (10%)

How much is still owed on current mortgage loans, credit cards and finance companies compared with the original loan amounts? Also it’s important not to open a number of new credit card accounts just to increase your available credit. It will have the opposite affect and lower your score.