If you have a good credit score, that means it's easier for you to get credit cards and loans and to qualify for favorable terms. If you have a bad credit score, it can prevent you from getting any loans, making big-ticket purchases or being able to get a Visa or MasterCard. You need to know the factors that affect a credit score if you want to know why yours is high or low and if you want to improve it.
Payment History
According to Fair Isaac Corp. (FICO), the biggest factor that affects a credit score is a consumer's payment history. This history accounts for a full 35 percent of the score. If a consumer pays his bills on time, this will have a positive effect on the score. If he is late on his payments, his score will go down. A consistent history of late payments has a much greater effect than only one or two incidents. The length of time also has an effect. Payments that are delayed by 60 to 90 days or longer have a more serious influence than those that are late by 30 days or less.
Amount Owed
The amount of money owed by a consumer is the second most important factor influencing her credit score. In addition to the balances, FICO says the types of accounts also play a role. The number of installment loans such as a mortgage or auto loan is weighed against the number of revolving accounts, such as credit cards or store accounts. This accounts for 30 percent of the credit score.
Other Factors
Three other factors make up the remaining 35 percent of a consumer's credit score. FICO says the length of a consumer's credit history is worth 15 percent of the score. A longer history has a better effect than a brief one because it gives a more accurate picture of the consumer's long term fiscal performance. The types of credit used and the number of new accounts make up 20 percent of the credit score.
Range
The five factors that affect a credit score are calculated to come up with a three-digit number, which can run up to 850, with the best scores running between 720 and 850. According to FICO, consumers with this score typically have no problem getting credit and qualify for the lowest interest rates. Those who score between 700 and 719 may pay more interest, but they can still readily open new accounts. Scores between 675 and 699 carry a higher interest penalty, while those whose scores fall below 675 may have trouble getting credit and will pay extremely high interest rates if they do.
Distribution
According to FICO, the majority of Americans have a credit score between 750 and 799. Another 18 percent of the population scores between 700 and 749. Only 13 percent have a score of 800 or over, and only 7 percent score 549 or below. Consumers who have a low credit score can boost it by improving their payment history because that factor wields the heaviest influence.
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