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.

The precise formulas and methods used to calculate a credit score are closely guarded proprietary secrets. Nevertheless, the FICO corporation, the leading developer of credit scoring processes, has made the general outlines of their process available to the public. Knowing this can help the consumer understand what factors are used to formulate their credit score and what items to correct or appeal to get a higher FICO score. The following list of factors provide a general outline of what the FICO looks at and what weight it assigns to these factors:

Payment History: This data carries the most weight in the analysis. It makes up 35% of ones score. This is information about a persons payment history, whether it has been on time or not. Scores are lowered for slow payments.

Available Credit Ratio: This is the second highest-weighted factor, making up 30% of the score. The scoring process looks at how much credit has been extended to a person and compares it to how much credit is outstanding at any given moment. Available revolving credit will increase a persons score; closing revolving accounts will lower the score. Paying down outstanding loans regularly without closing them also has a positive affect on your FICO score.

The length of a persons credit history is the third most important factor, weighted at about 15% of ones FICO score. Since the FICO score is meant to help the lender predict how the consumer will behave with the loan, the more of a credit history the borrower has, the more likely it is that past behavior will be indicative of future behavior. Therefore, the longer ones credit history is, the higher the score will be.

Types of Credit and Recent Credit Inquiries: These two factors make up the last 20% of your score, or 10% each. There are different kinds of credit available to consumers and FICO looks at how an individual has handled these. If there are different kinds of credit that has been handled successfully then it raises the score. The number of recent credit inquiries can give a picture of a persons current financial situation. If there are a lot of inquiries into someones credit the score will go down.

This outline should go a long way towards helping the consumer understand how their credit score, and specifically their FICO score, is calculated; it should empower consumers to act wisely, increase their FICO scores, and be rewarded with better terms for their loans.

Wendy Polisi is the founder of Finance the Dream which offers Rent to Own Housesand 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 credit repair, please visit her at Credit Repair College.

FICO 08 is now out and many lenders have already adopted this new credit scoring module.  Depending on your situation, it can either help or hurt your credit score.

Here are the key changes:

• Collections under $100 will not count against you. 

• The new model will be more forgiving of people that had a single major problem two years or more ago, but otherwise their accounts are in good standing.

• Piggybacking will no longer be allowed. This is an unethical practice, very often suggested by unscrupulous credit repair companies, where people paid someone they didn’t know to become an authorized user on their accounts.  A spouse or a child are the only people that can be added as authorized users and receive credit reporting benefits.