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Credit Score Breakdown

Posted by Arnold on 04/16/15, 07:47

Several factors play into the calculation of your credit score. Because your FICO credit score is claimed to be "the standard credit score in the US, used in more than 90% of lending decisions" (according to myFICO.com), it would be relevant to see how this score is calculated. Knowing the breakdown of the FICO score may help you make better decisions about improving your score, and may even make you realize why some of your financial moves may have been less helpful in boosting your score.

• Payment History (35%): Negative information is collected in the form of late payments, bankruptcies, foreclosures, etc. Boost your FICO score by paying accounts on time. It can take months, or even years, for derogatory info to be removed from your credit history, so be sure to consistently make your payments to keep your score from dropping.
• Amounts Owed (30%): This isn't just the standard debt-to-credit ratio. FICO uses other metrics for this factor, such as how many accounts have balances and how much is left to pay off on an installment loan. High credit balances, multiple accounts with balances, and/or maxing out credit cards may contribute to a lower FICO score. Closing unused zero-balance credit accounts won't raise your score, either.
• Length of Credit History (15%): Credit history length is determined by the length of time:
  • your credit accounts have been established (including oldest, youngest, and average account lengths)
  • specific credit accounts have been established
  • it has been since you last used certain accounts
  
  

  Closed credit accounts aren't used in calculating average account length, but they're still used in considering your credit score.

• New Credit (10%): Applying for a lot of different credit accounts in a short amount of time will negatively affect your FICO score. Although FICO says this factor has been designed to allow for "rate shopping", this doesn't mean you should go and quickly open several accounts.
• Type of Credit (10%): The basic types of credit you can get are installment loans, revolving accounts, finance company accounts, and mortgage loans. Having more than one type of credit will provide FICO with more information on which to base your credit score, but it isn't necessary to have an account of each type.

All 5 of these factors work together to make up your FICO score. Some areas may need more attention than others because of their weight, but 1 factor isn't more important than another. Attend to all 5 areas, and you can be sure to grow and maintain a healthy credit score.

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