Your FICO score can dictate the quality of certain aspects of your financial life. The Fair Isaac Corporation calculates a FICO credit score for borrowers based on several key credit management characteristics. While common advice for keeping a good FICO score includes paying down your debt and paying your bills on time, several "sneaky factors" affect the direction of your score, as well.
Debt Utilization Ratio
Obviously, lots of debt can have a negative impact on your FICO score. If, however, you manage that debt well, you might still boast a strong score. When your outstanding credit balances run close to your available credit, your FICO score usually reacts poorly. The Fair Isaac Corporation refers to the ratio of your total debt relative to your available credit as your debt utilization ratio. The higher the percentage, the more likely the chances you are putting your FICO score in peril.
Damage Potential
The MyFico website puts it plainly: "High scores can fall further." If you have experienced credit problems at some juncture, FICO may already have factored them into your score. When something else goes awry, the downside might be greater than you expected. If you have a high score and few, if any, any credit problems, one slip-up can result in a more dramatic score decrease.
New Credit
The Fair Isaac Corporation uses several points related to new credit to calculate your FICO score. For example, recent credit inquiries and newly opened accounts come into play. Your score also fluctuates along with the amount of time since credit inquires and new account openings.
Types of Credit
Having and managing various types of credit can bode well for your FICO score. The science behind a FICO score considers the types of credit you have and use, which include credit cards, student loans, auto loans and personal loans. If you have several credit cards and installment loans and you manage them effectively, your score should benefit. That said, running out and opening up a whole bunch of new accounts could have the opposite effect.
Credit Inquiry Timing
The FICO score assesses the time between credit inquiries when devising your score. For instance, if you are shopping around for the best loan rate, conduct all of your inquires within a short period of time, instead of over long durations. The FICO score detects inquires pertaining to one particular search credit and various different ones.
Closing and Paying Accounts
When you pay off a collection account, it does not disappear. Instead, the Fair Isaac Corporation reports that collection accounts stay on your credit report for seven years. While they are there, they generally have a negative influence on your FICO score. Just because you close an account, it does not mean the FICO gods don't consider it when calculating your score. If there's a balance or another key factor associated with that entry, it will continue to counts toward your score.
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