The Fair Isaac Corporation, also known as FICO, began in 1956 and is a leader in providing credit scores to lenders. FICO credit scores range from 300 to 850 and represent the risk to lenders that you will pay your debt on time and in full---the higher the score, the lower the risk. Credit scoring companies like FICO use only the information found in your credit report to determine your score. The exact formula is complex and variable, but FICO provides guidance on general categories and how much weight they carry toward your overall score.
Payment History
Your payment history has the most influence on your credit score, comprising 35 percent of your total. Late payments, delinquencies and collection actions negatively affect your credit score, and the more recent they are, the more weight they carry. To keep a high score in this area, FICO recommends you pay your bills on time, or if you are delinquent, get caught up as soon as possible and stay curent.
Amounts Owed
FICO scores rely heavily on the amount of debt you carry, allotting 30 percent of your score to this category. A key aspect of this area of your FICO score is your credit utilization, the percent of debt you carry compared to your available credit. Keep your balance on an individual card, and your total debt-to-limit ratio, below 50 percent to maintain the highest rating in this area.
Length of Credit History
Your credit history length looks not only at your longest-held account, but also at your average account age. Opening a number of new accounts in a short timeframe will lower your average account age and could decrease your credit score. Fifteen percent of your FICO credit score depends on your length of credit history.
New Credit
New credit makes up 10 percent of your FICO score, and includes not only new cards but recent inquiries on your credit report. Lenders make hard inquiries when you request a loan or credit card, which can be a sign that you are looking to obtain more credit than you can manage. FICO allows a short window of time for rate-shopping, for example if you are looking for a mortgage; inquiries within this window count as one inquiry and do not have a cumulative negative effect on your credit score. Soft inquiries for pre-screened credit offers and your requests for your own credit report will not affect your credit score.
Types of Credit Used
The final 10 percent of your credit score consists of the types of accounts you have or have had. A mix of credit types shows that you can manage different types of accounts, both revolving credit in which the payment changes monthly and the loan is open-ended, and installment loans with a fixed payment for a specified length of time. FICO advises you not to open accounts simply to obtain a mix of credit types, as this will likely not have any affect on your credit score.
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