A FICO score is something that lenders use to decide what type or interest rate they can offer you. When you get a loan, the bank will use your personal credit and your FICO score to determine you eligibility of the loan and the appropriate interest rate.

That score is based on the FICO model and the interest you pay, as well as your monthly payment, is based on what your personal credit score number is.

Just as with a car loan or house loan, you FICO score determines your interest rate. Something most people do not know however, is that a FICO score can also affect your chance of finding new employment, which is increasingly important in the current economy.

There are a lot of things that go into FICO scoring and we will group that into about five categories.

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

History of Payment (35%)

Your payment of history is the biggest indicator for a lender whether or not they should lend you money. Thus , it is also the biggest factor in creating your FICO score. This means that how many of your bills are unpaid or late has a the biggest affect on your credit. The more recent the late payment is, the worse the score. Bankruptcies will take it down even farther and stay with you for over seven years.

Outstanding Debts (30%)

This is determined by the amount of credit that is being used on a revolving credit line like a credit card, determining your credit to debt ratio. Ideal is about 40/60. This means if you have credit card with a $10,000 limit, you have an outstanding balance of 4,000.

History of Credit (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%)

Whenever you apply for credit, there is always an inquiry on your report and they will negatively affect your score. Some inquires are considered soft pulls of credit. A soft inquiry would be checking your personal credit or your report. Some insurance companies will do a soft pull also so as to not harm your report.

Credit Types (10%)

How much is your current amount on your loan in comparison to the original amount due? Is that amount for a car loan or a mortgage? This is what is meant by type. Also, how many account do you have open? If you have three accounts already open, it would probably not be wise to add another line of credit just to get a higher limit. This will hurt this category more than it will help your credit/debt ratio.