Most of us are familiar with credit scores, but are not really sure how the score is generated. The first thing to understand is there 1000 different ways to score your credit. They are all based on your credit report and the most recognized is the FICO score. Developed by Fair Isaac, FICO scores entail a highly complex formula to determine a credit score with each factor’s value dependent on other pieces of information. There are five main factors that weigh into your FICO score to know.
- Payment History – This makes up 35% of your FICO score. This is the largest portion of the score and is due to the direct relationship of defaulting on loans and not paying bills on live score time. Your FICO score looks at the negative events and judges based on the recentness of late payments, the frequency of late payments, and the severity of late payments. Severity meaning how late were you in paying your bills, 30 day, 90 days and so on.
- How much you owe makes up to 30% of your FICO score. Utilization is the term used and it the sum of all your outstanding debt divided by your credit limits. Your FICO score sees this as the lower the better since the higher default risk on those who are close to their credit limits
- How long you have had credit equates to 15% of your FICO score. Lenders like a longer history of accounts. There are two major factors here are the oldest account’s age and the average age of all your accounts.
- Applications for credit make up 10% of your FICO score. This factor looks at how long has it been since you last applied for a new credit account. A negative factor here could be if you apply for several accounts in a short period of time. It is a factor based on the viewing times of your credit report by lenders.
- The credit mix you use makes up the last 10% of your FICO score. They want to see a “healthy mix” of credit. There is no rules to what a healthy credit mix really is, but certain types of debt are seen as better than others.