Your FICO score is the most common
credit score used to make decisions on whether or not you are
considered financially responsible and worthy of extending credit
to. Your credit score, specific to you, is made up of 5 components,
each assigned a specific percentage. Using the information
contained in your credit report, FICO takes the data and breaks it
up into five categories. The following is a list of the five
categories and an explanation of how each category contributes to
your overall score.
Payment History:
Payment
history makes up 35% of your total score, making this category
the most important and influential factor in determining your
score. While each account you maintain is reported with your
repayment history, FICO attributes your failure to repay larger
loans as more damaging to your score and states the easiest way to
improve your score is by making timely and consistent
payments.
Credit Utilization:
The area of credit utilization, the amount of available credit
that you borrow or use, makes up 30% of your score, still
contributing to a large chunk of how your score is
calculated. In simpler terms, credit utilization is how much
of your available credit you have used. For example on your
credit card, are you close to you maximum limit or do you try to
keep your balances low by paying off the card in full every month
or making an effort to pay a good majority of the debt? FICO
says that utilizing about 10 to 20% of your available credit is a
reasonable amount to help you maintain a good
score.
Length of Credit History:
The length of time you have maintained each account makes up 15%
of your credit score. Consumers who have maintained positive
accounts for longer periods of time will benefit from their
financial responsibility and be able to improve their
score. Obviously, if you are new to the world of credit,
it will be next to impossible to have a perfect score, so the
sooner you start to build credit the closer you will be to
improving your score.
New Credit:
While new consumers will not reap the benefit of building their
score from a previous credit history, opening and maintaining new
accounts makes up about 10% of your score. While a credit
newbie should avoid opening too many new accounts, opening a few at
a time will and making timely payments will build your credit and
show you are financially responsible. FICO encourages
consumers to open accounts only as necessary to avoid looking like
you are in financial trouble and need access to credit, which would
deter lenders from extending you credit.
Variety of Credit:
FICO says that having a variety of debt will improve your
score and attribute to your overall score by as much as
10%. Maintaining credit cards and installment loans will help
keep your score positive and show lenders that you are less of a
credit risk by your ability to pay off a variety of debt in a
timely fashion.
If you need assistance or advice about how to improve
your credit score, contact SmithMarco P.C. for a free case review.