Your credit score is a major factor lenders use in determining whether to offer you credit, such as loans, mortgages and credit cards. The score calculated by the Fair Isaac Corporation (FICO) is most widely used by lenders. Even though the exact FICO algorithm is not released by the company, it does reveal five general categories used in the credit score formula. Understanding these five factors may help you make better decisions that affect your credit score.
Payment History
The largest factor affecting your credit score is your payment history, accounting for 35 percent of your score. Payment history includes accounts such as personal loans, credit cards, mortgages and student loans. This also includes public records, such as bankruptcies or collections. More recent negative information in your credit history has a greater detrimental impact. For example, being late with a credit card payment six years ago has a much smaller effect on your score than being late the past two months.
Current Debt Levels
Your current debt levels make up 30 percent of your FICO credit score. The more you owe, the lower your credit score. However, not all debts are created equal. For example, a secured debt, such as a mortgage, does not negatively impact your credit score as much as unsecured debt, such as a credit card. This category also considers the amount of credit you are using relative to your credit limit. MSN Money suggests keeping your credit card balances at less than 30 percent of your credit limit.
Length of History
The length of time you have used credit affects 15 percent of your credit score. The longer you have used credit, especially different types of credit, the better your credit score will be.
New Accounts
Credit inquiries account for 10 percent of your credit score. Each time a lender pulls your credit score when you apply for new credit, an inquiry goes on your credit report. The more inquiries you have, especially in a short period of time, the more your credit score will drop. Inquiries only remain on your credit report for two years. MSN Money warns against opening new accounts when you do not need additional credit.
Credit Types Used
The mix of credit you use affects 10 percent of your credit score. The wider your range of credit, the more trustworthy you appear to creditors. For example, someone who has used only a credit card will not have as high a credit score as someone who also has had mortgages, car loans and student loans.
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