The FICO score was created by the Fair Isaac Company. A FICO score, also known as a credit score, is a tool based on algorithms and statistics used by creditors to determine the creditworthiness of customers and helps to determine the likelihood that a debtor will default on a loan. Relying on the FICO score helps lenders determine how much risk a customer poses when borrowing money. Accurately assessing a customer's risk is paramount in helping to eliminate bad debt. A number of factors are used when calculating a FICO score.
Payment History
Your payment history carries the most weight when it comes to calculating your FICO score. The payment history of a particular credit file, contributes 35 percent to the creation of a FICO score. When you pay your debts on time you help put yourself in position to have a good credit score. Whenever payments are late your score can decrease, which causes you to pay more for credit products in terms of finance charges. Your payments will be larger as well. If there are judgments, collection accounts, liens, bankruptcies or foreclosures, your credit score will decrease substantially. These items can remain on your credit file for 7 years and some bankruptcies for 10 years. The longer bad credit is on your file the less of a negative impact it has.
Amount of Debt
The amount of debt you have as well as your credit usage contributes 30 percent to the formation of your FICO score. Accumulating a lot of debt will decrease your credit score. If you use more than 30 percent of the available credit you have access to, your credit score will begin to decrease. Paying down your debt will decrease your usage and help increase your score.
Length/History
The longer you have been on file with the credit reporting agencies the better. The length of your credit history contributes 15 percent to the creation of your FICO score. If you close one of your older credit accounts after you pay it off, you are eliminating a portion of your credit history. This account will no longer contribute to your credit history, and it will lower your credit score.
New Accounts
New credit accounts contribute 10 percent to your credit score. If you open too many new accounts your credit score could decrease. A lot of new accounts decrease the median age of all your credit accounts. Only open accounts you need. Never try to manipulate your credit score by increasing your available credit with new accounts.
Types
Your credit file should be a combination of different types of credit accounts such as credit cards, auto loans and mortgage loans, which helps to increase your score. It is especially beneficial for your credit score if you have credit card accounts as part of your credit portfolio, which you are managing effectively.
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