The FICO score model is the mostly widely used scoring model. As per Fico, as much as 90% of lending decisions that are done using a scoring model, use the Fico scoring model. In this post we will discuss the 5 most important factors that Fico would look at in order to calculate your credit score.
Timely Payments - 35%
The first and most important factor is paying all your bills on time. Mortgage, car leases, credit cards, etc. all get reported to the credit bureaus. Therefore, be sure to be on top of all of your bills all the time to ensure that they get paid in a timely manner. If you are late on payment be sure to pay it as soon as possible.
When a payment is late, the dollar amount is almost irrelevant. It doesn’t make much of a difference if it is one dollar or a thousand dollars. Late is late.
Credit Utilization - 30%
Credit utilization is how much of your credit line you spent. Banks don’t like it when you max out your credit. Never spend more than 9% of your credit line on each individual personal credit card. Moreover, be extra cautious not to spend more than 50% percent of your revolving credit lines. It will damage your credit (almost as much as a late payment).
It is recommended to always have one credit card that has a zero balance at any given time.
(Most business credit cards (unlike personal cards) i.e. Amex Open, Chase Ink, etc. do not report to the credit bureau (so long as you’re not late on the payments) so they can be maxed out without a problem).
You can read more about credit utilization here.
Credit History - 15%
Credit history is the length of time you had credit. The older your credit is, the better. That said, it is helpful to have at least three or four credit cards which do not have an annual fee. Keep them open; since the longer you have them, the higher your score.
For more on this read Building Credit History Properly.
Credit Mix -10%
Credit mix is how many types of credit you’re able to juggle (the more the better). It is beneficial to have a total of five active trade lines with a mix of installment loans and revolving credit.
Examples of installment loans would be; mortgage loans, car loans, car leases, or any loan which has the same fixed amount to be paid every month.
Examples of revolving credit would be a credit card, line of credit, or any loan that does not have a fixed amount that needs to be paid every month.
You can read more about the credit mix factor here.
New Credit -10%
New credit reflects someone that recently applied for new trade lines. When you get approved for a new credit card, mortgage, etc. your score may go down a bit due to the new tradeline. This effect can last up to six months from the date you got approved (with a mortgage loan the effect will last up to 12 months). The more new trade lines you have the bigger impact it will have on your credit score.
But keep in mind that even if you get declined for a credit card your score may still get hit by a few points due to the credit inquiry (credit inquiries effect your credit score no matter if you get approved or not).
What Is Not Significant In Calculating Your Fico Score?
It is important to know which factors affect your credit score. But, in my opinion, it’s just as important to know which factors do NOT affect your credit score. Here is a list of factors that are not factored in your credit score.
- How often you open and close bank accounts
- If you pay your rent on time
- Whether you disputed credit card charges
- The place you live
- Your age
- Your marital status, race, or religion,
- A disability, if you have
- Public assistance, if you receive
- Your job and how much you earn (its no difference if your homeless or a millionaire)
- Child support obligations, if you have
- Whether you are in credit counseling
- Interest rates on your credit cards or other loans
- Credit inquiries you have made to view your credit report
- Information that does not show how your credit report. Or, Information that is no longer on your credit report
- Credit inquiries that are older then 12 months even if they still show on your credit report.
- Credit cards that were closed in good standing – even if it states “closed at credit grantors request”
Hope this post will help you better understand how Fico scores are calculated. If you have any questions feel free to leave a comment and I will respond.
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