FICO. What is it, and how do they come up with it, you may be asking yourself. The FICO score, a three digit number ranging between 300 and 850, was developed by Fair Isaacs Reporting Company to determine the risk profile of a borrower, and it is composed of five factors, each contributing to the score by a certain percentage. The five parts of the score, and their respective percentages are: Payment History(35%), Amounts Owed(30%), Length of Credit(15%), New Credit(10%), and Type of Credit Used(10%). The three major credit reporting companies in the United States all have their own credit score that is based on the FICO score. The three companies and their respective credit score names are, Experian (Experian-Fair Isaac System), Transunion (Empirica System), and Equifax (Beacon).

The computation of these five factors in a mathematical formula will produce one single number which is your credit score. Examining each factor will help you improve your credit score or build a high one if you don't yet have credit.

Payment History concerns the timeliness of your payments. If you have payments that go into default, are late, go to court, or are charged off, these will all negatively affect this section of your FICO score. Very serious issues such as bankruptcies also figure into this 35%.

Amounts owed pertains to what you owe all credit companies. Usually companies do a debt to credit ratio to figure numbers for this factor. You want to have small balances on all your cards to keep a good debt to credit ratio. The lower you keep the debt relative to credit the better. Don't start closing cards down before you investigate how this will affect your debt to credit ratio across all your credit cards.

Length of credit examines how long you have had credit with companies. There isn't much you can do here besides allow time to pass while making payments on time. You can attempt to become a user on another person's card(if they have good credit obviously).

New Credit- This factor deals with applying for new credit cards. Generally, you do not want to keep requesting card after card as this will in fact hurt your credit score if you get denied. So make sure you really need to apply for a card, and that you have a chance of getting it as well if you are going to request a new credit card.

Types of Credit Used- As a consumer of credit you can take out many different types of credit, and all unique credit will be figured into your credit score. You want to use revolving and installment credit equally, and pay them both of on time. Revolving credit is credit that does not have a fixed number of payments, such as a credit card. Installment credit has a fixed number of payments, for example, a car loan.

So, you may be saying, “Why should I care about this so much?”. Well, let's take the example of a 30 year fixed rate mortgage of $200,000 and compare what your interest and monthly payments would be with a 500 credit score and a 800 credit score. The 500 FICO would have a rate of 10.1% with a monthly payment of $1,784, and the 700 would have a rate of 5.7% with a monthly payment of $1,163.