The FICO score is the most widely used credit score by lenders to determine whether to issue you a loan. The algorithm developed by the Fair Isaac Corporation takes information in your credit report and converts it to a three digit number, between 300 and 850, with higher scores meaning lower risk. Your FICO score is based on five categories: your payment history, how much you owe, how long you've had credit, what credit you have applied for recently, and the types of credit you've used.
Payment History
How you have paid your bills accounts for 35 percent of your FICO score. This section of the score looks at whether you make your payments on time or whether you have made late payments, or payments that were less than the minimum required payment. Also examined are any delinquent accounts or accounts that you have defaulted on, including accounts discharged during a bankruptcy. The more recent the history, the more heavily weighted it is. For example, a late payment two months ago will hurt your score more than a late payment five years ago.
Balances Owed
The amount of money you owe on your trade lines accounts for 30 percent of your credit score. This section examines not only how much you owe, but the types of debt you owe. If you owe a significant amount on a mortgage, it will have a less detrimental effect on your score than having the same debt levels on credit cards. In addition, the score looks at how much of your available credit you are using. For example, if you have $2,000 in credit card debt, but a total credit limit of $10,000, you are only using 20 percent of your limit. However, if you had that same amount of debt but had a credit line of only $2,500, you would be using 80 percent of your credit limit, which has a more negative effect on your credit score.
Credit History Length
The length of your credit history accounts for 15 percent of your credit score. This section looks at the length of time you've been using credit and how long each of your current trade lines have been open. The longer you've had credit, the higher this part of your score will be.
New Credit Applications
Each time you apply for new credit, such as a new credit card or loan, an inquiry is noted on your credit report and remains for two years. These credit inquiries account for 10 percent of your credit score, and the fewer you have, the better for your score. Not every inquiry is counted equally. For example, the FICO scoring model expects you to shop around for car loans and mortgages, so as long as you apply for these loans within a short period of time, the scoring model will only count them as one, no matter how many you apply for.
Mix of Credit
The final 10 percent of your credit score is calculated by looking at the variety of credit that you have used. According to the FICO scoring algorithm, people who have experience with different types of credit are lower credit risks than people who have not used credit or may have used only one type of credit in the past. Having used multiple types, like a credit card, mortgage, and installment loans such as student loans, will result in a higher score.
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