You are probably wondering what determines your FICO credit score and how you can maintain a good score. FICO doesn’t disclose their credit score formula but they do tell us the factors and guidelines used, as well as what goes into each guideline category.
Payment History (makes up 35% of your total score)
This is the most important factor in determining your credit score. In order to ensure a high credit score, you must make bill payments on time. The Payment History factor refers to how often you have made debt payments on time in the past. In order to ensure a high credit score, you must make bill payments on time. Late payments will continue to reflect in your credit score for up to seven years. Consider setting up your payments to be automatic as one way to reduce the risk of late payments. Or, if necessary, call customer service to try and extend your payment schedule and avoid late fees.
Amounts Owed (makes up 30% of your total score)
The amount you owe represents the total amount of unpaid debt. Having a large amount of unpaid debt is a concern for lenders. An additional factor in this category is the percentage of money spent in a given line of credit. Try to keep the amount you owe on lines of credit such as credit cards to 30% of the credit limit or less. For example, if your credit card limit is $100, try not to carry a balance (owe) over $30.
Length of Credit History (makes up 15% of your total score)
The sooner you begin to establish a credit history, the better. Lenders like to see you can manage debts over a longer period of time.
New Credit (makes up 10% of your total score)
It’s really important to be selective about your credit applications. For example, if you opened a retail store credit card you or your family signed up for to get a discount on your purchase, that probably cost you a few points on your FICO score. Opening up many lines of credit raises concerns from the credit bureaus about why you need so much credit from a financial standpoint. Limit the times you apply for new credit to one or two times a year at most.
Types of Credit Used (makes up 10% of your total score)
Lenders want to see that you can manage and budget for different types of credit. You can do this by opening different types of credit such as a credit card (revolving credit), a car loan (installment loan), and utility bills (open account). Again, remember to only open one or two new credit accounts per year.
