How Credit Scoring Really Works: Breaking Down the FICO Formula"
The 5 Pillars That Decide Your Financial Reputation
If your credit score feels like a mystery or a moving target—you’re not alone. But the truth is, FICO scoring isn’t magic. It’s math, data, and behavior... calculated over time and under pressure.
In Class 5, we pull back the curtain on the five core components that make up your FICO credit score, used in over 90% of lending decisions. Whether you're building credit from scratch or trying to repair it, this lesson gives you the tactical knowledge to take back control.
💥 Here's what we cover in depth:
🔴 1. Payment History – 35% of Your Score
This is the heavy-hitter. One late payment—especially if you're starting from a high score—can cost you 60 to 125 points.
We break down:
Recentness: How long ago was the late payment?
Frequency: Is it a pattern?
Severity: 30 days? 60? 90+? The longer you wait, the deeper the cut.
Pro moves:
Set up auto-pay across all accounts—no exceptions.
Learn why grace periods are a trap, not a buffer.
If you’re in trouble, call your creditor before you miss a due date—many have hardship plans they won’t advertise.
🟡 2. Amounts Owed – 30%
It's not just about what you owe—it's about how much of your available credit you're using.
This is your credit utilization ratio, and it applies to:
Credit cards
Store cards
HELOCs
Scoring tip: It’s better to have four cards at 10% usage than one card maxed out at 100%.
We explain how to spread debt smartly and which balances to pay down first.
🟢 3. Length of Credit History – 15%
Lenders want to see seasoned credit, not just brand-new accounts.
What matters:
The age of your oldest account (don’t close it!)
The average age of all your accounts
Why closing your oldest card is like torching your financial resume—and what to do instead.
🔵 4. New Credit – 10%
This is where hard inquiries come into play—every time you apply for new credit, your score can dip.
But there's nuance:
Shopping for auto or mortgage loans? You’ve got a short window (14–45 days) where multiple inquiries count as one.
Credit cards? Each inquiry hits you individually.
We also cover the scoring impact of opening too many new accounts too fast.
🟣 5. Types of Credit in Use – 10%
A healthy score likes diversity—called a “credit mix.”
What’s better?
A balance of installment loans (like auto or student loans) and revolving credit (like credit cards).
Bank-issued credit cards carry more weight than retail store cards or "easy approval" lenders.
We show how the system judges the quality of your credit—not just the quantity.
Takeaways:
How to build your score strategically without gaming the system
The difference between FICO vs. VantageScore
Why context matters: a late payment on a thin file hurts more than one on a thick file
This isn’t about perfection. It’s about strategy, timing, and consistency.
👉Subscribe for the full series, and myth-busting breakdowns at creditgenius.substack.com
📘 Credit Scoring – Class 5: 20 Question Multiple-Choice Test
1. What percentage of your FICO score is determined by your payment history?
A. 15%
B. 30%
C. 35%
D. 10%
2. Which factor has the second largest impact on your FICO score?
A. Credit history length
B. New credit
C. Types of credit
D. Amounts owed
3. Why is closing your oldest credit account a bad idea for your score?
A. It increases your score temporarily
B. It shortens your credit history
C. It improves your utilization
D. It removes bad credit
4. What is a credit utilization ratio?
A. The number of accounts you have
B. The age of your credit accounts
C. Your credit card balance divided by your credit limit
D. How many types of credit you use
5. How often do most lenders report account activity to the credit bureaus?
A. Weekly
B. Every 6 months
C. Monthly
D. Daily
6. What is considered a 'hard inquiry'?
A. Checking your own credit
B. Applying for a new credit card
C. Receiving a promotional offer
D. Reviewing your score online
7. How many types of credit should you ideally have to build a strong score?
A. Only credit cards
B. Just one account
C. 2–3 revolving accounts and 1 installment loan
D. 5 store cards
8. Does using a debit card help improve your credit score?
A. Yes
B. No
C. Only if linked to savings
D. Only at major retailers
9. Why do bank-backed credit cards carry more weight than store cards?
A. They have higher interest
B. They’re easier to get
C. They’re harder to get and more versatile
D. They’re linked to savings
10. What is the benefit of having a mix of credit types (installment and revolving)?
A. It lowers your score
B. It shows you can handle different types of debt
C. It increases your debt
D. It simplifies your finances
11. What happens to your score if you max out one credit card but leave others unused?
A. It improves
B. It stays the same
C. It may drop due to high utilization
D. It improves if you pay minimums
12. What does 'grace period' typically mean in credit terms?
A. You don't have to pay at all
B. You're forgiven for late payments
C. You still owe, but reporting is delayed
D. You can skip interest payments
13. How does FICO treat multiple auto loan inquiries made within a short window?
A. Each one reduces your score
B. They're combined into one inquiry
C. They're ignored
D. They're penalized heavily
14. What is the best way to handle a credit card you no longer use?
A. Close it immediately
B. Let it expire
C. Keep it open and use it occasionally
D. Cut it up and forget it
15. Which of these is NOT a revolving credit account?
A. Credit card
B. Store card
C. Auto loan
D. Line of credit
16. Which action will most likely improve your credit score?
A. Applying for 3 credit cards at once
B. Paying bills on time
C. Closing your oldest account
D. Ignoring soft inquiries
17. What is a good rule for credit utilization ratio?
A. Keep it under 50%
B. Keep it at 100%
C. Keep it under 30%
D. Don’t use credit at all
18. Which credit behavior is most damaging long-term?
A. One hard inquiry
B. High credit limit
C. Frequent late payments
D. Using only one card
19. What’s the impact of paying off a collection account on your FICO 8 score?
A. Big increase
B. No impact
C. Small positive impact
D. Score goes down
20. What’s the best way to establish credit if you’re just starting out?
A. Get multiple store cards
B. Use cash only
C. Get a secured credit card or credit builder loan
D. Avoid all credit for a year
✅ Answer Key
C
D
B
C
C
B
C
B
C
B
C
C
B
C
C
B
C
C
D
C
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