FICO (formerly Fair, Isaac and Company) is a credit scoring company that produces FICO credit scores. The algorithms, or formulas used to calculate FICO scores are proprietary to them. However, like all other credit scores, FICO scores are calculated using the information in your credit report.
FICO scores weight five types of information from your credit report in the calculation:
- Payment history is by far the most important factor in credit scores. It is essential to pay your bills on time, every time. Any late payment is going to have a significant effect on credit scores. Your payment history accounts for about 35 percent of a credit score.
- Utilization, which is the balance-to-limit ratio on your credit cards, is the second most important criteria in credit scores. You never want a balance to be higher than 30 percent of the credit limit on a single credit card or in total.
To determine your utilization rate, add up all of your balances and all of your credit limits and divide the total of your balances by the total of your limits. That percentage should not be more than 30 percent as a maximum. The lower your utilization, the better.
Ideally, you should pay your balances in full each month. People with the best credit scores have zero late payments and utilization rates of less than 10 percent. Your utilization rate accounts for about 30 percent of your credit score.
The first two factors account for nearly two-thirds of your score. Paying your bills on time and keeping your balances low on your credit cards are essential to having good credit scores. The other elements in a credit score build on those first two:
- Length of credit history is based on the length of time each account has been open and how long it has been since you used certain accounts. A longer credit history can increase your credit scores. Length of history accounts for approximately 15 percent of a FICO score.
- Recent activity looks at how much new credit you have applied for in the past three to six months. Applications for credit are shown as new inquiries. Recent credit isn't limited to inquiries, though. It also includes paying off accounts, whether accounts have become delinquent or have been brought current and whether account balances have increased or decreased significantly. Recent credit accounts for 10 percent of a FICO score.
- Credit mix refers to the different kinds of accounts you have including mortgages, credit cards, auto loans, and other installment loans. Having a variety of credit types can help increase your score slightly, but you should not apply for several accounts all at once to try to improve this element. Doing so will likely do more harm than good because of the impact on recent credit activity. Instead, use credit wisely and you will naturally build a good mix of credit types over time. The mix of various types of credit accounts for 10 percent of a FICO score.
You can learn more about what goes into your FICO score on the Ask Experian blog.
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Scoped on: 8/17/2017