FICO SCORE

The FICO credit score scale ranges from about 300 to 850 with a US median around 723. A score above 720 is considered to be a good FICO credit score, and a score below 620 is considered to be a sub-prime FICO credit score. Fico Scores/Reports A difference of 3% for the average $150,000 home mortgage could mean more than $100,000 in extra interest to the sub-prime borrower over the life of the loan. You have a vested interest in raising your credit score whether you do it yourself or use a professional.

Supposed Factors in FICO Credit Score

FICO scores and its variants are designed to estimate the risk of loan default. Although the exact formula for determining credit score is a closely guarded secret, Fair Isaac has disclosed the following components and the supposed approximate weighted contribution of each:

• 35% punctuality of payment in the past
• 30% capacity used: balances owed to total available credit
• 15% length of credit history
• 10% types of credit used (installment, revolving, consumer finance)
• 10% recent search for credit and/or amount of credit obtained recently

YOUR Credit Score IS A STATISTICAL FORMULA

The official percentages provide very little value in understanding a FICO credit score. For example, the 10% of the score allocated to "types of credit used" is undefined, leaving consumers unaware what type of credit mix to pursue. "Length of credit history" is also a murky concept; it consists of multiple factors, two being the oldest account open, the average length of time an account has been open. Although only 35% is attributed to punctuality, if a consumer is substantially late on numerous accounts, his score will fall far more than 35%. Bankruptcies, foreclosures, and judgments have a big affect on credit scores but are not even included in the simplistic explanation from Fair Isaac.

There are several generally accepted algorithms for extracting the primary contributing factors to a low credit score. One or more of these algorithms is typically used to supply a list of reasons when a loan applicant has been denied credit so that the lender can satisfy Regulation B. These adverse action reasons are disingenuous, as the only determining factor for credit denials is a numeric score — the "reasons" are provided only to satisfy Federal regulations and the consumer.

HOW TO MANAGE YOUR FICO SCORE

There are two things you can do to improve your FICO score: (1) delete negative items from your credit reports, and (2) manage your existing accounts in a way that will improve your FICO credit score.

Even with this briefest of summaries you get a sense that not being late on any current obligations will improve your credit score. Since you know that 30% of your credit score is determined by the amount of available credit on your existing accounts, you get a sense that manipulating these balances will affect your credit score.

Is there any software that uses the actual information on your credit report to do "what ifs" so that you can see exactly what affect paying down an outstanding balance, or adding another credit card or revolving account will have on your FICO credit score?

Yes, there is. Suze Orman's FICO Kit Platinum does that, and more. You can read a review of the Suze Orman FICO kit here.