There are five areas that impact your FICO® Score. Let’s break these down along with the weight of each category.
- Payment history (35%): Payment history plays the biggest role in your score, and it’s also the easiest to explain. If you make your payments on time, that helps your score. If you pay late, it hurts your score. It’s worth noting that a payment isn’t reported late by the credit bureaus until it’s 30 days past the due date. If you have accounts that have been placed in collections or charge-offs, these are also considered bad for your score. Finally, bankruptcies and foreclosures are also factored in here. The effect of these negative marks does fade over time, though it may take several years.
- Amounts owed (30%): In this category, the total amount you owe across both revolving debts (like credit cards) and installments (like mortgages, car loans and personal loans) is a factor. The thing to really pay attention to at this point is your credit card usage because it’s the one thing you can control on a monthly basis. You want to keep your balances low relative to your overall credit limit. This ratio affects your score. The best thing you can do is buy only what you can afford and pay it off every month. In addition to being better for your score, you won’t have to pay interest. The reason we’ve focused heavily on credit cards is that your installment loans tend to have to do with things you need. Student loans were good for school, and you need a roof over your head. A lot of us need a car depending on the state of public transportation in our area. On the other hand, credit cards are one area where discretionary spending tends to be placed.
- Length of credit history (15%): The more time you’ve spent building your credit history, the better it will be for your score. If you’ve had years of good history, lenders have more to go on than for someone who’s just getting started with credit. However, it’s not rated so highly as to avoid deeply penalizing those who are new to credit.
- Credit mix (10%): Ideally, lenders want to see you can handle having a decent sampling of both revolving and installment credit. This shows you understand various types of financing. However, those with a younger credit history tend to have just a credit card or two. That’s OK because this category isn’t a huge factor in the formula.
- New credit (10%): Each time you apply for a new credit card or loan, your credit score goes down a little bit temporarily. The thinking here is that if you need to apply for new credit or a loan there’s always the chance you could be overextending yourself financially. If you make your payments on time (among other good habits), your score should be back where it was in no time.
The traditional FICO® Score has a range of anywhere between 300 – 850. Anything over 670 is considered a good score. There are also special versions of your credit score that go from 250 – 900 for credit cards and car loans.
This isn’t universal, but generally when lenders take a look at your credit score, the one they’re paying attention to is from FICO®.