Build a FICO Score You Can Be Proud Of -- The First Step is Understanding!

In the United States mortgage lenders rely heavily on an applicants FICO score in making lending decisions. The score is a reflection of the applicants ability and willingness to repay loans; it also impacts the terms of any loan offered and even whether or not the loan is offered at all. A higher FICO score generally translates into a lower risk loan for a creditor; higher scores usually mean better loan terms and rates.

How a FICO score is calculated is a proprietary industry secret held in the strictest confidence. However, the FICO corporation has made available a general outline of what information they use in the credit scoring process. Knowing what makes up a FICO score empowers consumers to raise their scores by handling credit appropriately. Here is a list of the factors used in calculating a FICO score, including how important each kind of information is to the formula:

Payment Habits: Everyone knows it is important to make payments on time, and now you know why: this is 35% of your overall FICO score. Slow payments lower your score and conversely on-time payments raise the score.

The second most important factor is the ratio of credit used against the amount of credit available. The best scores come from having a large amount of credit available while only using a small fraction of it. This score is increased by paying down outstanding loans, but without closing the loan. Closing revolving accounts, such as credit cards, lowers this score; while keeping them open but paid down increases it. This factor is weighted at some 30% of a persons credit score.

Duration of Credit History: The FICO score is a tool to give creditors insight into how a person will behave if credit is extended. The longer the credit history the more information is available to indicate how a person will handle future loans. The longer your credit history the higher this part of your score will be. At 15%, it ranks third in weight for the scoring process.

Two additional factors weigh in at about 10% a piece. These are the number of types of credit one has successfully managed and the number of recent credit inquiries. The FICO score generally considers the successful use of diverse types of credit as a positive factor. FICO also looks at the number of recent queries into a persons credit and considers this indicative of the persons current financial situation. The more queries made " meaning the more credit the person has applied for recently " the lower the score.

Knowing these factors and their relative weights can help the potential borrower modify their behavior in order to get a higher FICO score and hopefully more favorable terms for their loans.

Wendy Polisi is the founder of Finance the Dream which offers Houses for Rent to Own and Lease Options throughout America. To find out more about how they can help you get into your dream home, please visit them at financethedream.com. To learn more about Improving Credit Score, please visit her blog.