If you’ve ever had a problem with your credit score you know that getting to the bottom of it, figuring it out and getting it taken care of is not an easy task. It’s as though the credit card companies got together with the banks and said “hey let’s put together a set of rules that only we will be able to figure out and will leave our customers scratching their heads and frustrated”. (Insert an evil corporate laugh here.)
If you’re keen on breaking their code and figuring out what you credit report (actually, your credit reports) says you’re in luck because today we’ve got a blog for you that will break down the FICO formula, explain what all 5 parts mean and how they weigh on your score. When you’re done reading you’ll be ready to tackle any credit report issue with less stress and more common sense. Enjoy.
35% of your score is your payment history. Now, to be fair, the average consumer knows that paying their bills on time is a good idea and good for their credit. That being said, there are simply just times when bills overwhelm us and we end up paying late. The question thus becomes; what to do once the damage is already done? Honestly, not much (at least for 7 years). You can start rebuilding your credit if you’ve had a bankruptcy but make sure to talk to a professional to find out what rules and regulations are in effect in your particular state. There are a lot of myths about credit scores and bankruptcy out there and getting good advice is vital. Keep in mind that any unpaid debts that went into collection, even once you pay them off, won’t likely help raise your FICO score (although it could help you from being sued)
30% of your score is how much you owe right now. This is actually one of the most important factors as creditors will look at your credit limit and see how close to it that you are. The further you are from your credit limit the better and thus it behooves you to borrow on credit as little as possible. What this all refers to is something called credit utilization. If, for example, you have $100,000 worth of credit but you’re currently using 92% of it, lenders will consider that you are over utilized and won’t be very willing to give you more credit. If, on the other hand, you have only $16,000 on credit, lenders will consider your credit to be under-utilized and will be more willing to lend you more money. Interestingly enough, while paying off credit cards can have a positive impact on your credit utilization, closing those accounts when your balance reaches zero can have a negative effect. (It’s a numbers thing.) Most experts would advise you to keep the card but not use it rather than close it.
15% of your score is the age of your credit history. This is a simple one to understand in that the older the account is that you have the better it will be for your credit score. If you’re just getting started establishing your credit there really aren’t any shortcuts here, it’s just about opening some credit lines, paying them on time and putting in your time. Although there are people that try to ‘piggyback’ by adding older accounts to their reports, this generally doesn’t work. One thing you can do to bring down the average age of your credit report is, once you have several credit accounts in your name and you’ve been paying them off on time and dutifully, you gradually open some new accounts (and do it sparingly).
10% of your score is new credit inquiries. Every single time that you try to open up any type of credit account there will be an inquiry created on your credit reports. Quite a few people worry about these credit inquiries even though they only make up a small part of the actual scoring formula. We feel that these fears are overblown and that, if anything, this is a factor that you actually have some control over. If you’re keen on building your credit you certainly want to limit the number of inquiries so that it doesn’t look like you’re desperate or that somebody has hacked your account. Also, remember that you can check your own scores with a monitoring service and it won’t hurt your credit score or affect it at all.
10% of your score is the types of credit that you have. Most of the people who score high in this factor have several different types of accounts, including installment loans, auto loans, revolving credit accounts and possibly even student loans. While the type of credit card that you carry really doesn’t make a huge difference on your credit score it’s a good idea to have at least one of the major credit cards (Visa, MasterCard or Federal Express) and one or two retail cards. Since retail stores have some of the worst interest rates on their credit cards we advise that you get them very sparingly and always pay them off on time.
One question we get regularly is about credit reports that have information missing. Simply put, not all lenders report your accounts to credit reporting agencies and, if you are working with one that doesn’t, you probably won’t be able to do much to change the situation. On the other hand, it’s always good to take a closer look if you believe something is missing and make sure that it’s not due to some type of mix-up or mistake.
And there you have it, a neat little blog about the 5 parts of your credit score that matter most.Hopefully you will now be able to better understand not only what your credit score number actually means but also the five factors that affect it the most. We hope you enjoyed this block and we invite you to come back again sometime soon for more great financial information just like this. See you then.
