Your credit can affect many aspects of your life, from qualifying for a home mortgage to receiving a job offer. According to Fair Isaac, inventors of the FICO scoring model, a FICO credit score ranges from a low of 300 to a high of 850. There are five distinct factors that FICO considers when calculating your credit score.
Bill Payments
How well you pay your bills accounts for 35 percent of your FICO score. On-time payments will increase your score. Late payments will cause your score to drop, and the later the payment, the more your score will decrease. Other negative payment factors that can lower your score include charge-offs, repossessions, judgments, tax liens and bankruptcy. You should make at least the minimum payment on all of your bills each month to avoid damage to your score.
Debt Load
The amount of debt you carry makes up 30 percent of your score. In this percentage, FICO looks at your credit-to-debt ratio, which is the amount of available credit you have versus the amount of that credit that you're using at any given time. The more credit you have available, the higher your score. Maxing out a credit card will cause you to have more debt than available credit and this will lower your score. This area also looks at the overall debt load that you have on installment accounts, such as a mortgage, car loan or personal loan. The more you pay down your overall debt load, the better your score becomes.
Credit History
The length of your credit history accounts for 15 percent of your score. FICO averages the total length of all of your credit accounts. The longer the credit history, the higher your score. According to FICO expert Barry Paperno, closing an account may lower your score because once it's closed, a bureau will automatically remove it from your credit file after ten years -- maybe sooner if the credit issuer purges it from their database. You will then lose the history associated with the account and that could ding your score.
New Credit
FICO rewards new credit and it accounts for 10 percent of your score. Nevertheless, FICO warns against opening new accounts just to improve your credit score because it could backfire. Each new account that you open shortens the average length of your credit history. This may initially lower your score instead of raise it. Plus, each new credit application places an inquiry on your report. Opening a lot of new accounts at once is considered risky behavior by FICO and this may lower your score. Only apply for credit when necessary.
Credit Mix
The final 10 percent of your score reflects the various types of credit present on your report. FICO likes to see responsible behavior with different types of credit accounts: credit cards, a mortgage, car loan and personal loans. Still, FICO does not encourage the opening of accounts just to have a better mix since this may affect other areas of your credit score. Obtain accounts as needed but not to improve your credit score.
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