The Fair Isaac Corporation produces FICO scores, which are the standard for determining the creditworthiness of potential borrowers. These credit scores are based on information found in the individual credit reports. The FICO score is based on five factors: payment history, the amount of money you owe, the length of your credit history, your recent applications for new credit and the types of credit you use.
Payment History
Your payment history accounts for about 35 percent of your credit rating. Your payment history looks at how often you have paid your accounts on time, how many of your payments have been late and any accounts you have defaulted on. Your recent history is counted as a higher percentage of your score---a missed payment five years ago will hurt your score less than a missed payment within the past year.
Amount You Owe
Approximately 30 percent of your credit rating is based on your level of indebtedness. This section takes into account all of the money you owe, whether it be on credit cards, installment payments or mortgages. It also takes into account how much of your available credit is being used. For example, if all of your credit cards have a combined limit of $1,000, and you are using $800 of that available credit, your score will be lower than if you had a total credit limit of $4,000 and you owed that same amount.
Length of Credit History
The length of your credit history makes up about 15 percent of your total credit rating. The longer you can show you have been responsible in using your available credit, the more trustworthy of a borrower you will be perceived to be and the higher your credit score will be. To help improve this part of your score, keep your oldest credit card accounts open to show a longer history of credit management.
Applications for New Credit
The amount of new credit you have applied for recently accounts for about 10 percent of your credit rating. Lenders perceive people who have recently applied for large amounts of new credit as a greater credit risk. An exception to this is when you are applying for a car loan or home mortgage. Since most people will apply to multiple financial institutions for these types of loans, as long as the loans are made close to each other, the FICO score only counts them as one inquiry. This exception does not apply to multiple credit card applications.
Types of Credit
The variety of credit you use counts for about 10 percent of your score. Lenders view individuals who have used a variety of credit types as a better credit risk because they are usually more informed about how to use credit; someone who uses only credit cards will tend to have a lower score for this section than someone who has a mortgage, installment payments and credit cards.
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