FICO Is A Standardized Credit Scoring System
The Fair Isaac Corporation, FICO, developed a systematic way to assign a numeric evaluation to determine the consumer’s creditworthiness and the risk level in extending them an offer of credit. This scoring system accounts for the information found in your credit report, and based on their level of importance, are weighted and used to calculate a number from 300-850. A lower number indicates low creditworthiness and a high risk to lenders, while higher numbers indicate lower risk to lenders.
Lenders favor borrowers with higher credit scores, rewarding them with excellent interest rates and lower fees. By contrast, consumers with low credit scores will often pay much more in interest, fees, down payments, and possibly collateral to open a credit account.
Multiple Factors Influence FICO Scores
There are five factors used to calculate your FICO score:
- Your payment history
- The amount of credit you have access to
- The length of your credit history
- The number of hard inquires
- Your credit mix
Other factors, such as employment and income, do not influence your score but may be used by lenders when considering you for credit.
Here is a breakdown of each factor and how much weight it has in calculating your final credit score.
1. Payment history – 35%
Payment history has the most significant impact on your FICO score as it accounts for 35% of your total score! Your payment history is a record of your credit accounts and their payment status. If you have missed payments, collections accounts, or any other negative marks on your payment history, your score will reflect that.
2. Credit utilization rate – 30%
Credit utilization shows banks and lenders how much credit you have access to. The higher percentage of your total credit in use can indicate that you are spending above your means. Individuals with good FICO scores consistently keep their credit utilization under 30%, while those who have scores over 800 keep their credit utilization under 10%.
3. Length of credit history – 15%
Your experience with credit, or the length of your credit history, accounts for approximately 15% of your credit score. Lenders like to see that potential customers have experience using credit responsibly over a long period of time. FICO scores are generally higher for consumers with credit accounts open longer.
4. Recent credit applications – 10%
FICO scoring also considers the number of recent hard inquiries on your credit report. Multiple new inquiries can indicate that you may be a risk to lenders, especially if your credit history is new.
5. Credit mix – 10%
The final factor in FICO scores is the diversity of your credit accounts. Do you only have revolving (credit card) accounts, or do you have multiple account types, showing experience with various credit products and responsibly repaying them.
Steps You Can Take to Increase Your FICO Score
Your credit utilization and payment history combined account for more than 60% of your score. If you are looking for a guaranteed way to increase your score, focus on decreasing your credit utilization rate and ensuring you have a solid payment history!
Start making payments on accounts now so that you are current with all your lenders. Every on-time payment you make positively impacts your payment history and by extension, can increase your credit score!
If Multiple Factors Are Bringing Down Your Score, Help Is Available!
If you are reading this and do not even know where to begin to improve your credit, do not despair! Credit Helpers are available to guide you on a path to credit repair, they will work with you to give you the level of support and advice you need, whatever your goals may be!