Written by: Daniel Kukainis
Topics: Credit Score, FICO, Credit Report
Your FICO Credit Score is made up of 5 different sections that determine your overall credit score. Your FICO score is a credit score that is based off of FICO (Fair Isaac Corporation), a company which analyzes credit behavior to determine the credit risk of the borrower/customer. FICO “looks at a range of credit information and uses that to create scores that help lenders predict consumer behavior, such as how likely someone is to pay their bills on time (or not), or whether they are able to handle a larger credit line.” The Three Major Credit Bureaus (TransUnion, Equifax, and Experian) use your FICO Score to determine your credit score for lenders.
The 5 Different Sections that Determine your FICO Score:
Payment History – 35%
Credit Utilization – 30%
Credit Age – 15%
Different Types of Credit – 10%
Number of Inquiries – 10%
Your Payment History makes up the largest portion of your credit score. This means that if you have paid all of your credit card bills/loans/mortgages on time you will max out this portion of your credit score. “Closed accounts that were always paid on time remain on credit reports for 10 years from the date of last account update, while accounts with late payments remain for seven years from the date of first delinquency.”
Your Credit Utilization also makes up a large portion of your credit score. This is derived from a simple equation of how much balance you have on your revolving credit lines, compared to how much the maximum that you can use on those credit lines. Keeping yourself below a 30% utilization rate will have a beneficial impact on your credit score. You may want to consider a loan if you find yourself above a 50% utilization rate.
Your Credit Age is compromised of the average age of open credit accounts that you have. Lenders usually like to see that you have over 6 years of Credit Age, but there are ways that young individuals can help their Credit Age. If you have student loans, consider your credit score before you completely pay them off. If you only have a small amount left, it may be more beneficial to continue to pay the minimum required amount. This is because your student loan is likely the longest credit line that young individuals will have open. Once it becomes closed it can greatly impact your Credit Age, reflecting in a decrease in your credit score. Another important factor to remember is that getting a new credit line will lower your Credit Age – so make sure you are choosing one that you plan on keeping for a while that will give you the most benefits.
Different Types of Credit
Your Different Types of Credit also have an impact on your credit score. Lenders like to see that you are able to balance making payments to several different types of credit lines – preferably over 10 open and closed accounts. As long as you closed an account that made on time payments and you did not owe anything additional on that line, it can benefit you for this factor of your credit score.
Number of Inquiries
Your Number of Inquiries for applying for a credit line make up the smallest (along with Different Types of Credit) portion of your credit score. Lenders like to see less than 3 hard inquiries on your credit report. This makes it extremely important to know your approval odds before you apply for credit. Credit inquiries usually stay on your report for about a year. Checking your credit on a website like creditkarma.com will not impact your credit, because they use a complex algorithm to determine a score that is designed to be similar to your FICO score. You are entitled to one free Credit Report from the three major Credit Bureaus – TransUnion, Equifax, and Experian without hurting your credit. Before you decide to make a major purchase at a store or apply to rent an apartment, it is a good idea to ask if they will be putting a hard inquiry on your credit report.
Understanding and owning these 5 key factors can be a huge impact on your everyday life. Having a higher credit score leads to lower monthly payments and more money in your pocket!
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