Although a credit score is one three-digit number, it is calculated using five separate factors. Fair Isaac Corp. has developed a formula that uses certain information from credit reports to determine this number, which is used by lenders and financial institutions to rate your creditworthiness. You should know the five factors and how much weight each one carries so you can improve your credit score or maintain it if you have a good one.
Payments
The payments made on credit cards and installment loans have the biggest effect on your credit score. Fair Isaac Corp. (FICO) says this factor counts for 35 percent of your credit score. Several factors related to your payment history are taken into account. This part of your credit scare is based on whether you make payments on time, how late you make them or whether you skip some payments entirely.
Balances
FICO states that the amount you owe on various credit cards and loans is the second biggest factor affecting your credit score. If you have several accounts with high balances, this will have a negative effect. Smaller balances in good proportion to your income will make a positive impact. The account types also play a role, depending on the proportion of installment loans, credit cards and other accounts on which you carry a balance. Thirty percent of your credit score is based on this information.
History Length
Your credit history accounts for 15 percent of your credit score. The longer you have had credit accounts paid promptly, the more this factor will affect your credit score positively. If you are starting out and have only one or two accounts, this will keep your score down until you establish a more lengthy history.
Account Types
Your credit account types factor in your credit score at 10 percent. FICO says that the variety of accounts, including installment loans, home loans, credit cards, store cards and other types of credit, influence your score. A balanced mix has the most positive effect.
New Accounts
The age of your loans and credit accounts also play a role. FICO says it accounts for 10 percent of the score. Your credit score can suffer if you have recently opened a large number of new accounts. This could indicate potential financial need or problems.
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