Many people lack the knowledge about their credit scores, arguably the single most influential number in their lives. In fact, forty nine percent of 1000 consumers polled do not understand that credit scores measure credit risk, according to a recent survey by Fair Isaac Corporation, the company that credited the most widely used formula called FICO.
Hear are the five categories that make up a FICO credit score and how they are weighted.
1) Payment History: 35%
This category includes payment history information about several types of accounts such as credit cards, retail accounts and installment loans. Many factors are considered including number of past due items on file, amount of past due items on file, amount past due on collection items, and severity of delinquency (how long past due.) Close by is a chart depicting the weight assigned to each year of an individual’s payment history.
2) Capacity (Amount You Owe): 30%
The FICO scoring model weighs capacity heavily because it knows that the majority of Americans who go bankrupt charge up their cards to the limits before they file. The FICO model considers three separate components of an individual’s credit when assigning points:
1) Installment balances compared to the original loan amounts.
2) Revolving account balance compared to an individual’s revolving credit limit; and
3) Total revolving account balances compared to an individual’s total revolving limits
It is in your best interest to keep balances low on all revolving credit and pay off debt with open accounts instead of closing accounts and consolidating it into one or two accounts with higher balances.
3) Length of Credit History: 15%
Even if you no longer want an older account, you should think twice before closing it. Lenders are looking for borrowers with long credit histories. Also, those with new credit should be cautious about opening too many accounts. Account buildup may look risky.
Hard inquiries, or request from creditors for a copy of a report, are tracked on the credit report for 24 months. But, only the inquiries from the most recent 12 months are included in the FICO score calculation.
4) Types of Credit: 10%
This category looks at the overall mix of credit such as credit cards, mortgages, or consumer finance accounts. You should try to balance the mix but are advised not to open new credit accounts for balancing purposes unless necessary. It is unlikely that adding accounts will improve your credit score.
5) New Credit: 10%
Approximately 10% of your credit score is based on how many recent new accounts you have established. This factor reviews:
1) Number of accounts
2) Length of accounts
3) Recent requests for credit report
4) Length of time since credit inquiries