The Main Ingredients
The specifics of your FICO credit score are a closely guarded secret. Try as you might, you will not find out that a given action raises or lowers your score by a specific number of points. However, the Fair Isaac Corporation has offered some guidance for consumers. For starters, be aware that your credit score is based on five key factors (listed in order of importance):
Payment history
Amounts owed
Length of credit history
New credit
Types of credit used
Payment History
Your payment history accounts for 35 percent of your FICO credit score. It is the most important category. It looks at how you have paid your bills in the past. If you always pay at least the minimum required payment, and you get your payments in on time, then you are doing well in this category. When you think about it, this is the most important thing to lenders. All they want you to do is pay on your accounts as agreed.
If you need to improve your credit score, you can do so by attacking this category. Make sure that you are current with all of your creditors. If you're behind on payments, write a check to get caught up. If you can't get caught up, call them up and see if you can agree on some type of payment plan.
When evaluating your payment history, the scoring models dig into the details. If you're behind on a debt, the model checks to see how long you've been delinquent. The longer it has been, the more it affects your score. If you continually pay your bills on time, any late payments will become less and less significant.
Amounts Owed
The amount of your debt accounts for 30 percent of your FICO credit score. The scoring models look to see if you are using debt, how much, and what type. In general, you want to avoid the appearance of being maxed out. Therefore, you should only use a small portion of the total available to you. Ideally, keep your credit card balances at 35 percent or less of the maximum borrowing limit.
For installment loans such as mortgages and auto loans this is not as important. The scoring models calculate the maximum borrowing limits as your original loan amount, so you will be using a high percentage of that amount in the early years of your installment loan. As time wears on and you have paid off the majority of your installment loan, you will have demonstrated that you are a responsible borrower. This can only help your score.
If you need to improve your credit score, the best thing you can do is pay down your debts. If you're using $8,000 of credit on a card with a $10,000 limit, you are using 80 percent of your available credit — that is too high. If you write a check to that credit card company and bring your balance under $3,500, your credit score should increase almost immediately.
Length of Credit History
The length of your credit history accounts for 15 percent of your FICO credit score. The scoring models look to see how long you have been using credit. If you are a seasoned credit-using veteran, you are presumably more responsible (if you're not, it will be obvious in the payment history cate-gory). You can optimize your credit by keeping old accounts open.
New Credit
New credit accounts for 10 percent of your FICO credit score. The scoring models check to see if you are opening too many new accounts. You should avoid opening several new credit card accounts within a short period of time. This type of activity makes it look like you're desperate for cash, and lenders are hesitant to lend to people in desperate situations.
You should have a healthy mix of credit types. You might shoot for two to six revolving accounts, and a few installment loans. Some lenders require a minimum number of accounts to offer a loan, and these numbers will keep you in the ballpark. Don't do anything drastic to get there, you should open and close credit accounts slowly and carefully.
The scoring models also look at recent inquiries into your credit. Only hard inquiries are used in the score — inquiries as a result of your request for credit. Again, if you have too many inquiries within a short amount of time, you appear desperate for money. Therefore, you should limit the number of lenders that pull your credit. If you are shopping for a home or auto loan, the models will not penalize you as long as you keep all of your inquiries within a few weeks of each other.
Types of Credit Used
The types of credit you use account for 10 percent of your FICO credit score. The scoring models are looking to see if you use different types of loans. You should have a mixture of revolving debt, mortgage debt, and installment loans. While it may not hurt you if you don't have a mortgage on your credit report, having one will most likely help your score.
Your FICO credit score only uses information that is found in your credit reports. In fact, there is information on your reports that is ignored by the FICO scoring models. Your lenders may use some information in addition to your credit score. That information — such as your income or number of years at your job — might help you or hurt you.
“Thin” Files
If you have a “thin” credit history, it means that there is not much information about you on file at the major credit-reporting companies. This may be because you have not used credit much in the past — perhaps you are young, recently divorced from a spouse who used credit, or new to the United States. When you have a thin file, every move you make has more impact on your credit scores. Upward and downward swings will be more dramatic.
