When it comes to credit scores, the one you may be the most familiar with is the FICO score. The Fair Isaac Corporation developed this score, and it is currently the most widely used credit scoring system in the U.S. Your FICO score can determine your eligibility for loans such as mortgage loans, it can help determine what type of interest you will pay on your loans, and a low FICO score can even affect your ability to gain employment.
Five FICO Categories
It's important to note that the actual algorithm that Fair Isaac uses to calculate your FICO score is proprietary. This means that only the people at Fair Isaac know the exact formula and they guard it very closely. That being said, what is known are the five factors that do go into the formula. They are your payment history, the amounts owed, length of credit history, new credit and types of credit.
Payment History
Your FICO score looks at your debt repayment history. All things being equal, making your payments on time will lead to a better score. If you do have late payments, different factors are taken into consideration. Those factors include the severity of the delinquencies (were you a day late or were you 120 days late?), the number of delinquencies (late on one credit card or late on multiple cards?), and if any of your late accounts have been put into collections.
Amounts Owed
With regard to amounts owed, FICO considers three factors. One factor is the number of accounts with balances (do you have one credit card or do you have 15?). A second factor is the proportion of credit lines used (your total credit card balance divided by your credit card limits). A third factor is the proportion of installment loan amounts still being owed (for example, if you borrowed $10,000 for a car, how much do you still owe on that balance?).
Length of Credit History
In this factor, FICO looks at how long your accounts have been open and how long it has been since activity has occurred on any of the accounts.
New Credit
The new credit factor includes several considerations. Such as the number of recently opened accounts (did you open a new credit card in the last six months or have you opened five new department store charge cards in the last week?). Or the number of recent credit inquiries (perhaps in addition to the charge cards, you also went to several automobile dealerships and asked them about getting a car loan).
It also takes into account the time since recent account openings by type of account. Account types include revolving credit, such as credit cards, and installment credit, such as a car loan.
Types of Credit
This means the number of different types of credit accounts you use. How many auto loans, credit cards, mortgages and other debt obligations do you have or have you had?
For a complete analysis of all the factors that go into calculating your FICO score, see Resource section.
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