The FICO Score is the standard credit score that is used. This is the score that the majority of lendors use to determine your interest rates and credit limits. Your credit score is calculated from your credit report. The FICO score only looks at information that is in your report. Your credit score is made up of five categories. Each category holds a different importance but none should be neglected. However, the importance of any one category ultimately depends on the overal information in your credit report.
Credit Score Breakdown:
- Payment History (35%)
- Amounts Owed (30%)
- Length of Credit History (15%)
- New Credit (10%)
- Types of Credit Used (10%)
This is the most important factor in your credit score. By looking at your payment history, lenders can see whether you have been paying past loans on time. This helps determine how reliable you may be to paying your new loans back. If you miss a couple payments, it is not the end of the world. If you have an overall good credit history, it should not have too much effect on your score. Just don’t make it a habit because if you start to miss a lot of payments, your score will drop dramatically.
Lenders use this data to determine if you are overextended on credit. When they see someone using a large percentage of their credit or it is maxed out, it can be an indicator that you have overextended yourself. Lenders will see this as an indication that you are more likely to make late payments or miss payments altogether.
Length Of Credit History
For the most part, the longer your credit history is, the better chance your FICO score will improve. For this category, your score is influence by how long you have had your credit accounts. The age of each account and the average age of all your accounts all factor into the score.
This category looks at how often you are opening up new lines of credit and the time span you are opening them. Research has shown that opening several lines of new credit in a short period of time represents a greater risk. This is especially true for people that do not have a long credit history. The amount of recent credit inquiries, the time in between inquiries and how long it has been since you opened a new account all play a factor in making up this portion of the score.
Types Of Credit Used
Your FICO factors in the types of credit you are using. A good mix of credit cards, retail accounts, mortgages, and other loans is preferred. It is not necessary to have one of every type of loan. This factor is not key in determining your score but it can have more influence for people who have a limited credit history.