>When you hear the term credit score, a reference is likely being made to your FICO (Fair Isaac) score. Most of the banks in the
U.S. use the FICO score when determining your creditworthiness. Your FICO credit score can determine whether you qualify to get a
loan or open a credit card account. Your credit score also determines, for the most part, what your interest rate will be on any
money you borrow or on any credit that is extended to you. But how is this important score determined?
Closely Guarded Secret
The actual formula for figuring your credit score is a secret that FICO will not reveal, although the company does make
it clear what the general components of the score are. There are five different parts that make up your FICO credit score,
with some bearing more weight than others.
Five FICO Credit Score Elements
The five credit score elements or factors that FICO takes into consideration when
determining the individual credit scores of millions of people include:
- Payment history. The most important part of your FICO credit score is your payment history, and thirty-five percent of
your credit score is based on it. That means that whether or not you repay your lenders has the most effect on your score,
and that your past behavior is used to predict your future behavior as a borrower. FICO watches your revolving type credit,
like your credit cards, and your installment type credit, like student loans and mortgage payments. According to FICO,
if you default on a large loan, like a mortgage, your credit score is damaged more than if the loan was smaller.
Making timely, consistent payments is the best way to build up this part of your credit score.
- Total outstanding debt. Thirty percent of your credit score is based on the total of your outstanding debt.
More weight is placed on revolving lines of credit, like credit cards, than other types of credit when this part
of your credit score is figured. Maintaining low balances on your revolving credit lines shows lenders (and FICO)
that you can manage credit responsibly.
- Length of borrower’s credit history. Fifteen percent of your FICO credit score is determined by the length of
time that you have had credit. Having accounts that are decades-old is a good way to build a solid credit history.
Long term positive behavior in your credit file gives creditors confidence in your willingness to repay them.
- - New credit and credit mix each make up ten percent of your FICO credit score. If you are new to credit, credit experts
advise that you should take out just a few lines of credit at once, since opening up a lot of credit lines at once can make it
look like you are having financial difficulties, so keep new credit to a minimum. Credit mix just means that you have a
balanced mix of all types of credit, both revolving and installment credit. This shows lenders that you are capable of
handling credit in all forms.
The most important part of your FICO credit score is your capacity to hold up to your ‘end of the bargain’ when you take out credit.
Paying on time and being a good steward of your credit is the key to building positive credit history.
Regardless of your FICO credit score, whether or not credit is extended to you is also based on your ability to repay.
Even with a high credit score, borrowing beyond your ability to repay can end up having negative consequences. Potential
lenders will take your income into consideration when you apply for credit.
Updated: January, 10 2012