What factors determine your FICO score? Your payment history is key
- The most popular credit score – and the industry standard – is the FICO score. This credit score is used by 90% of major lenders around the world.
- The factors that make up your FICO score include your payment history, the amount of your debt, the type of accounts you have, the length of your credit history, and the number of new credit cards you have recently applied for.
- You can improve your FICO score by paying your bills on time, keeping debt balances low and making it easier to open and close accounts.
- Learn more about personal finance coverage.
Unless you are still living with your parents and have never applied for a credit card or a car loan, you probably already know how important your credit score is.
After all, have good credit can mean the difference between getting approved for loans and credit cards with the best terms and interest rates – or not getting approved at all.
If you do get approved for a loan with bad credit, you might also be forced to pay high interest rates and additional fees.
But knowledge is power, and you can help yourself in more than one way if you know how to pull the strings that keep your credit score in good shape. Because, like it or not, you’re the one with all the muscle when it comes to how your score shakes.
How is your FICO score determined, anyway?
Still, you have to know how to play the game if you want to win. For this reason, it is important to talk about how credit scores are determined.
Although there are several types of credit scores, we’ll focus on the FICO score for the purposes of this article. The FICO score, which is provided by the Fair Isaac Corporation, is the most popular credit score available today and is believed to be used by 90% of lenders.
So, let’s get down to business. here are the factors used to determine your score over time:
Payment history – 35%
Your payment history is calculated by determining how reliable you are when it comes to making your monthly payments on time.
While never having a late payment can have a positive impact on your score, more than anything else late payments can cause serious damage.
Amounts due – 30%
The second most important factor that makes up your FICO score is the amount of money you owe against your credit limits – that is, the amount of your debt.
Lenders tend to view high credit balances as an indicator that you are more at risk as a borrower. For this reason, it is always wise to keep your balances on the lower side. Experian experts suggest that keep your credit usage below 30% is a good move.
Length of credit history – 15%
The length of time you have opened various credit and loan accounts will help determine the average length of your credit history.
Credit issuers tend to view longer credit histories in a positive light because it gives them more data about your payment history and your general attitude toward debt repayment.
Credit composition – 10%
Your credit mix is determined by taking into account the different types of accounts you have opened, whether they are installment loans, revolving debt like credit cards, mortgages and other loans.
Generally speaking, you will score better in the credit mix category if you have several different types of loans and accounts.
New credit – 10%
If you open a lot of new credit card accounts in a short period of time, it could temporarily hurt your FICO score. However, the impact may not last long.
Also note that just one new credit card may have no impact on your FICO score.
How to use this information to your advantage
Now that you know how your credit score is determined, you have the proverbial key to the castle. The factors mentioned above also show that you are responsible for your credit and the actions you can take today to improve your score over time.
Here are some quick tips to increase your credit:
- Pay all your bills on time. Since your payment history is the most important factor in your credit score, paying all of your bills on time is crucial. Set up alerts if you need them and you can even set up automatic payment of certain bills. Either way, make sure you don’t fall victim to a late payment.
- Do not open or close too many cards at once. Opening too many new credit cards can hurt you on the “new credit” front, and closing old cards can shorten your credit history, thus hurting you in this category. The solution: don’t do anything drastic. Don’t open multiple cards at once to earn credit card rewards, and don’t close old accounts that you no longer use.
- Pay off as much debt as you can. Not only can you save money on interest when you lower your credit card balances, but you can improve your credit score as well. Strive to pay off as much debt as possible and you’ll thank yourself later.
The bottom line
If you feel like your credit score is out of your control, you are probably wrong. The actions you take – and the actions you don’t – are what will determine your FICO score in the long run.
There are some hurdles you may face when it comes to improving your credit, but that doesn’t mean you shouldn’t try. For the most part, you can have a decent score just by paying your bills on time and not racking up a lot of debt.
Also note that bad credit doesn’t have to last forever. While you can ruin your credit if you make too many mistakes, most credit scoring models give you the ability to slowly redeem yourself over time.