Published on February 28, 2019
What goes into a credit score?
Written by The Servion Group
Are your clients asking about their credit scores? This post might help you explain it!
Most people know they have a credit score, and they know the score affects things like whether they can get a credit card, what interest rate they get on a mortgage, and various other parts of life. But not very many people understand how credit scores are calculated, which can be frustrating.
Many different factors go in to a credit score (hundreds of factors, actually) and a variety of organizations provide the scores. But let's focus our attention on the FICO score, perhaps the most authoritative of all the scores, and take a look at the elements of the FICO credit scoring model.
Payment History – 35%
FICO says past payment behavior is a big indicator of future payment habits. FICO makes repaying past debt the most important factor in determining a person's credit score. To improve a score or maintain one that's already solid, making consistent, on-time payments is the best thing you can do.
Credit Utilization – 30%
What percentage of your available credit are you using? According to FICO, a 7 percent usage rate is ideal, although anything up to 20 percent won't really cause an issue. A good rule of thumb is to keep this usage rate in mind for both your individual credit card accounts and your total credit picture.
Length of Credit History – 15%
The longer your credit history, the higher the likelihood that your score will be higher. FICO looks for items like the age of your oldest and newest accounts and how frequently you use your credit.
New Credit – 10%
If you open up multiple lines of credit in a short amount of time, that tends to throw up a red flag and harm your credit. That's particularly true for borrowers who have short credit histories.
Types of Credit – 10%
This final factor isn't very well defined, but FICO says they look for a pattern of paying back different kinds of debt. For example, it's considered a good thing to make on-time payments on a variety of accounts, including credit cards, mortgages, and installment loans.
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