Understanding Credit Score

06:22:57 AM Thursday, September 18, 2008

Credit Deals: Factors That Influence Your FICO Score

Those people who start building their credit history from scratch know how important a FICO score is. Weird as it may sound, but this three-digit number that can range from 300 to 850 seems to play a great role in our financial lives. You could be a good, excellent or a bad cardholder depending on this very score.

Your FICO score is used by a vast majority of lending institutions to estimate your trustworthiness and their risks. And what's more importantly, interest rates and fees on the loans you apply for will be set on strength of your score rating. No wonder why every credit user tries to build a high score rating. By knowing how your card use affects your score rating, you can establish and maintain good credit and get best rates on offer.

It's not news that certain factors influence our FICO score. You can find lots of articles covering the topic of building good history or credit repair, they explain what you should do and what to avoid in order to fix your score. The question is, how is your FICO calculated? What is the weight of each factor in your credit score?

35% of your score is determined by your payment history. The way you pay your accounts is of great importance. Even if you have ever made late payments, the smallest details, including how late you are, and the amount of late payments, also count. A strong overall record of on-time payments helps to boost your score.

Another 30% of your FICO score is determined by credit utilization. FICO scoring formulas will take into consideration the amounts you owe and the amount of credit available. Lenders would like to see a nice gap between available credit and your outstanding balances. In other words, the less credit you utilize compared to your spending limits, the higher your score will be.

The length of your credit history accounts for 15% of your FICO. So, when it comes to canceling plastics, try to keep those cards you've had the longest. A good alternative to canceling old plastics can be just using them from time to time, i.e. once in a six-month period, so that they count toward your utilization ratio.

New credit makes up 10% of your score. When applying for too many cards at a time, you appear to be a high risk. This can lower your FICO score, so it's recommended to avoid opening several new accounts within a short period of time.

The types of credit you use accounts for another 10% of a score rating. Most customers, especially those with longer histories, generally have a mix of different types of credit. Revolving accounts like credit cards can add slightly to your score rating.