Whats in a Credit Score
A credit score is a 3 digit number attached to a borrower that creditors and lenders use to decide whether lending money to that person is worth the risk. A higher score represents a higher likelihood that you will pay back the money that you borrowed, and a lower score indicates that you are a riskier investment, and are less likely to make your monthly payments. In the land of credit scores, FICO reigns king. The bulk of banks and credit lending businesses in the United States use your FICO credit score to determine your trustworthiness for a loan, as well as what interest rate will be applied to that loan. Therefore, it is important to know what factors into your FICO score, and what you can do to affect it.
At 35%, your payment history is the biggest factor in determining your FICO score. Payment history is the repayment of past debt, and is used to forecast the likelihood that you will repay future debt.
If you consistently max out your credit cards and are late on payments, many lending organizations will view you as high risk and will be less likely to lend to you. Maxing out your credit is an indicator that you are irresponsible with your debt, especially if you have multiple accounts that are consistently over-extended.
Length of Credit History
As in most things in life, the longer that you have been doing something, the more practiced and skilled you will be. This applies to credit as well, and is how the banks will view your ability to handle credit. If you have had a credit card for 10 years and have been making regular, timely payments on your account, your credit score will likely be higher than someone who has only had a credit card for 6 months.
New Credit and Credit Mix
The final two factors, both making up 10%, are new credit and credit mix. New credit is a factor that takes into account how recently you've opened accounts, and how much credit you've used on those accounts. Opening multiple new accounts at the same time indicates that you are in financial trouble, and may be more inclined to take on debt that you cannot repay. Credit Mix factors in your ability to make timely payments on different kinds of credit, such as credit cards, installment loans, and retail accounts. According to FICO, historical data indicates that borrowers with a good mix of revolving credit and installment loans generally represent less risk for lenders.
The importance of each of these categories will vary per person, but they will all be considered when determining your score. Having a grip on the various factors that make up your credit score will help you understand the actions you can take to raise it, which will help you to secure better interest rates, loans, and credit ratings in the future.