What makes up your credit score?

A few days ago I posted about creating credit resolutions for the new year.  I thought now would be a good time to review what makes up your credit or FICO score.

There are five key elements that comprise your credit score: payment history, outstanding debts, credit history age, inquiries, and account types.  Each of these items is weighted differently when calculating your FICO score.  Payment history is 35% of the score, outstanding debt is 30%, credit history age is 15%, and both inquiries and account types are 10% of your total FICO score.

So… what do each of these elements include and more importantly, what’s considered good and what’s bad for each component?

Payment History
Your payment history includes the details of how you’ve been paying your bills - i.e., whether you’ve been paying them on time, or even at all.  Each of your creditors reports your payments as on time or late.  Late payments are reported as being 30-, 60-, 90-, and 120-days late.  After six months of non-payment, many creditors charge-off your account, deeming it as uncollectible.  The more recent the late payments are, the worse the effect it is on your credit score.  Timely monthly payments boost your score in this area.

Outstanding Debts
This portion of your FICO score takes into
account the total amount you owe on all your credit accounts.  This
includes credit cards, student loans, auto loans, mortgages, lines of
credit, etc.  Not only does the FICO score consider the total amount
you owe, it also considers the total credit you have available.  This
ratio is known as your credit utilization.  The higher your credit
utilization – meaning the closer your balances are to the limit – the
lower your credit score.  You should keep credit account balances at or
below 30% of the limit.

Credit History Age
The length of time that you have had credit is
a determining factor of your FICO score.  A longer credit history is
better than a shorter one.  This is because there is more data to
create a pattern of good or bad payments.  This is why you shouldn’t
close old accounts, especially if they are accounts in good standing.

Inquiries
Each time a business uses your FICO score to make a
credit-based decision about you, an inquiry is made to a credit
bureau.  This inquiry then appears on your credit report.  Multiple
inquiries within a relatively short period of time have a negative
effect on your FICO score, especially if these are credit card
inquiries.  Few to no inquiries is better.  The good news is that only
inquiries from the past two years are factored into your FICO score.
Also, it’s important to note that when you check your own credit, this
is not considered an inquiry, and does not hurt your credit score.

Account Types
When you have several different types of credit
accounts – loans and revolving credit – it is better than having a
single type of credit account.

=> Learn how to boost your credit score in five easy steps.