How your credit score is established and ruined.
By Mary K. Phillips
FICO Scores are
calculated from a lot of different credit data in your
credit report. This data
can be grouped into five categories as outlined below. The percentages below
reflect how important each of the categories is in determining your score.
Payment history: 35%
Amounts owed: 30%
Length of credit history: 15%
New credit: 10%
Types of credit used: 10%
- Account payment information on specific types of accounts (credit cards,
retail accounts, installment loans, finance company accounts, mortgage, etc.)
- Presence of adverse public records (bankruptcy, judgments, suits, liens, wage
attachments, etc.), collection items, and/or delinquency (past due items)
- Severity of delinquency (how long past due)
- Amount past due on delinquent accounts or collection items
- Time of past due items (delinquency), adverse public records (if any), or
collection items (if any)
- Number of past due items on file
- Number of accounts paid as agreed
- Amount owing on accounts
- Amount owing on specific types of accounts
- Lack of a specific type of balance, in some cases
- Number of accounts with balances
- Proportion of credit lines used (proportion of balances to total credit limits
on certain types of revolving accounts)
- Proportion of installment loan amounts still owing (proportion of balance to
original loan amount on certain types of installment loans)
Length of Credit History
- Time since accounts opened
- Time since accounts opened, by specific type of account
- Time since account activity
- Number of recently opened accounts, and proportion of accounts that are
recently opened, by type of account
- Number of recent credit inquiries
- Time since recent account opening(s), by type of account
- Time since credit inquiry(s)
- Re-establishment of positive credit history following past payment problems
Types of Credit Used
- Number of (presence, prevalence, and recent information on) various types of
accounts (credit cards, retail accounts, installment loans, mortgage, consumer
finance accounts, etc.)
A score takes into consideration all these categories of information, not just
one or two. No one piece of information or factor alone will determine your
score. For some people, a given factor may be more important than for someone
else with a different credit history. In addition, as the information in your
credit report changes, so does the importance of any factor in determining your
score. Thus, it's impossible to say exactly how important any single factor is
in determining your score - even the levels of importance shown here are for the
general population, and will be different for different credit profiles. What's
important is the mix of information, which varies from person to person, and for
any one person over time.
Your FICO score only looks at information in your credit report. However,
lenders look at many things when making a credit decision including your income,
how long you have worked at your present job and the kind of credit you are
requesting. Your score considers both positive and negative information in your
credit report. Late payments will lower your score, but establishing or
re-establishing a good track record of making payments on time will raise your
Establishing Your Credit
Don't have credit? Would you like to improve your credit? Building good credit
doesn't have to be difficult, but it does require time and patience. Follow
these tips and you're on your way:
- Pay your bills on time.
Credit scores emphasize your most recent payment record. Paying on time raises
your credit score. If you've been late, start paying on time!
- Pay at least the minimum amount required.
You can always pay more - and it's a good idea if you can afford it. But you
should never pay less than the minimum.
Keep your credit card balances low.
- Don't "max out" your credit cards - that can lower your credit score.
- Don't apply for too many loans or new accounts.
Applying for a lot of credit in a short period of time may concern lenders that
you won't manage your debt well. Only apply for credit when you need it.
Keep your debt-to-income ratio at 20%.
Generally, you should not have credit card or other installment debt that's more
than 20% of your net monthly income.
Establish credit if you don't have any.
-Open a free or low-cost checking or savings account and make regular
deposits. Only write checks when you have money to pay for things. And apply for
one or two credit cards, use them carefully, and pay them off each month.