FICO Credit Score Factors

Your credit score is a number that quantifies how likely you are to pay debts on time. There are several different models for determining your credit score, but the FICO method is the most popular. Credit scores range from 300-850 and the higher your score, the more trustworthy you're deemed to be. Lenders use your credit to determine if they are going to loan you money and at what interest rate. Now let's take a look at the five factors used to determine your FICO score:

1. Payment history: Lenders look to see if you make payments on time. It comprises 35% of your credit score, which makes it the largest factor. If you are late on payments, have delinquent accounts, or have declared bankruptcy, your credit score will take a significant hit. Consistently making on-time payments will help your payment history.

2. Credit utilization: This is the amount of money you owe in revolving debt accounts (i.e. credit cards) compared to your available credit. The higher this ratio, the more negative the impact to your credit score. This makes up 30% of your credit score. Note that installment loans, such as mortgages, auto loans, and student loans are not factored into your credit utilization. Paying down outstanding balances on revolving debt will help your credit utilization.

3. Credit history length: Lenders review the age of your oldest and newest account and the average age of all accounts. The longer your credit history, the more favorable lenders view you. Credit history comprises 15% of your credit score. Remember that closed accounts fall off your credit report after 7-10 years, at which point they won't affect your credit score. The best way to increase the length of your credit history is to close recently opened accounts and keep older accounts open.

4. New credit and credit inquiries: Having potential lenders conduct a credit inquiry or opening a new account can negatively impact your credit score. New credit and credit inquiries do not impact your credit score after two years, but this only makes up 10% of your credit score. Although it has a minimal effect on your credit score, if you are concerned about this factor, try not opening up several lines of credit in a short amount of time.

5. Variety of credit: Having a healthy balance of installment loans and revolving accounts is good for your credit score. This also only makes up 10% of your credit score, so you may not want to open up a credit card or installment loan just to try to raise your credit score.

The issues that might be negatively impacting your credit score will dictate what you should do to improve it, but knowing the factors that make up your credit score is a good first step.