The FICO score is not a rocket science; there are a few factors that have the biggest impact on the number you get to see in your credit report, and which ends up determining the terms of the loan or a credit card type you can get. Therefore, it is important to know what this number is all about so you could behave accordingly.
Here are the key factors that make up your FICO credit score:
1. Payment History
Payment history makes up 35% of your credit score, so it is obviously the single most important factor in your FICO score.
Late payments on your credit card(s), retail accounts, car loans, and mortgage loans will see your FICO score drop by 100 points or even more. These missed payments will then remain in your credit history for seven years, but decrease in importance over time.
In addition, bankruptcies and foreclosures are also part of the payment history, and will stay in your credit reports for 7 years (though bankruptcies can stay there for up to 10 years).
2. Credit Utilization
The second most important factor that makes up 30% of your credit score is credit utilization ratio. It shows the amount you owe in relation to the total available credit. So if you owe $4,000 on a credit card with the credit limit of $10,000, your credit utilization ratio is 40%.
Ideally you should strive to have that number up to 30%, or even better — don’t owe a single penny to the bank and pay off your credit card bills as soon as they’re due (or before).
3. Length of Your Credit History
Coming in third is the length of time you’ve been using credit — it makes up 15% of your credit score. Generally speaking, the longer your credit history, the better it is for your credit score.
It kinda makes sense, as young people can’t expect to have the same credit score as those in their 40s with many years of credit use behind them.
However, it is important to add that your credit history includes the age of your oldest account, the age of your newest account, and the average age of all of your accounts — along with the length of time since you’ve used these accounts.
Therefore it is essential NOT to close your oldest credit card accounts; if you don’t use them, see with your bank whether you can replace those credit cards for something better WITHOUT actually closing the old account(s).
4. Credit Mix
Credit mix includes credit cards, retail accounts, installment loans, and mortgage loans — which combined make up 10% of your credit score.
In general, it is better to have a diverse mix of credit types. But, this mix is more important for consumers who have more limited credit histories and less information on their credit reports. Otherwise, other factors (listed in this article) will be taken into account.
5. New Credit
Finally, the newest credit accounts — including credit cards, mortgage loans, and auto loans — make up 10% of your FICO score.
According to myFICO’s data, consumers who open several credit accounts in a short period of time tend to default on their loans or miss credit card payments. Because of that, their FICO score could dip, especially if these consumers have a short credit history.
Now that you know what a FICO score is all about, what can you do about it? Can you modify some behaviours and, we’d like to add, act more responsibly? It’s worth the effort, we think.