Do you know how your credit score is calculated?
I am amazed at the number of people I talk to that do not understand that the calculation of your credit score is more than just paying your bills on time.

While that is certainly a major part of your score, there are 4 other factors that you need to keep in mind in order to maintain the best credit score possible.

There are several scoring calculators out there but the one that is the most utilized is the FICO score. The Fair Isaac Company, FICO for short, has only in the past few years released the parameters that they use when calculating the 'FICO' score. This number is used to decide your credit worthiness when you are applying for loans of any kind, so use this acronym to remember the five parts of your credit score:

L -  Late payments - ALWAYS PAY ON TIME

O - Owed vs. Credit Limits - KEEP THIS AT 35% OR LESS

A - Average age of all your credit cards - DON'T CLOSE

      OLD CARDS

N - New applications for credit - NO MORE THAN ONE

      EVERY 4-6 MONTHS

S - Spread - KEEP A GOOD SPREAD OF TYPES OF CREDIT

Okay, so I was reaching for that last one, but the idea there is to have both revolving (credit cards) and installment (mortgage or car loans). I don't mean that you should go out and buy a house or car just to get an installment loan, only that the FICO algorithm does take that into account. The stability implied by these types of loans makes you look more reliable.

The first two categories above (L & O) account for 65% of your score.

Building credit takes a long time but you can ruin it quite quickly so keep the above factors in mind the next time you are tempted to pay late or run up that credit card to its limit.

Retail Store Cards and your Credit Score

How many of you have ever been tempted to open a store credit card to save 10% on your purchase or get 12 months with no payments? Well, I hope you resisted! Did you know that every time you apply for credit it impacts your credit score and could very likely lower your credit score for the next twelve months. Even one retail card can affect your score in multiple ways!

1) When you fill out that new credit application, you are giving the store's credit card division permission to look at your credit reports. That means that there is an inquiry posted to your account by that retail store when they pull your report to evaluate your credit worthiness. Inquiries stay on your credit report for a year. Inquiries, even one, will negatively impact your score.

2) Adding a new credit card account effectively lowers the average age of all of your cards. This also lowers your credit score.

3) The low credit limit on most retail store revolving accounts also impacts your utilization of credit. If you have a $200 charge on that card and the limit they give you is only $250 you are at 80% utilization on that card. This could have a large negative impact if you are already running above the recommneded 35% utilization rate.

4) If you buy a large ticket item that allows you to make no payments for 12 months, your balance on that card remains static and is not seen as good credit management by creditors. It also increases your utilization ratio, both of which are harmful to your score.

5) If the store credit you receive is with a finance company that is seen as a 'bad' type of credit and decreases your credit score.

If you are already in a high risk category (FICO score under 650) you could be lowering your score even further by applying for a store card that 'saves' you 10% one time.  That lower score will impact your ability to get some other type of credit that may be more critical than buying an item on sale. It is something to think about.