Why Is My Score Important?
First, ask someone who has ever gone through the process of buying a house if they thought their credit score was important. Our guess is they’d say, “absolutely.” Nowadays, even renting an apartment requires a good credit score. Some apartments will base your deposit on your credit score. The lower the score, the higher the deposit.
Most lenders use your FICO score to see if you are a risk and determine your “creditworthiness.” Thus, there is a direct connection between your credit score and your ability to get credit – from credit cards to major loans. Not only that, but your score determines the amount of credit that will be extended and the interest rate you’ll get. So, a good score can save you a lot of money in the long run.
Taking care of your credit score is not that scary or hard – you just need to know how your score is calculated and make steps in the right direction. The good news is, no matter how bad it is now, it can always be improved!
How Do These Categories Apply to Me, Personally?
As you can see in the breakdown above, there are five main categories that contribute to your FICO credit score. The percentages show how important the data in each category is to your score.
Your FICO score is calculated based on information in your credit report, so the importance of each category depends on your overall credit history and can vary per person. Information that will not be considered in your FICO score are things like: race, sex, whether or not you’re receiving government assistance, whether or not you’re participating in credit counseling, what your interest rates were/are, where you live, etc.
Let’s take a look at the individual categories:
Payment History – 35%
This category carries the largest weight because it’s the first thing lenders will want to know when considering your creditworthiness: Have you payed past credit accounts on time? This includes credit card accounts, installment loans, mortgage loans, and finance company accounts. Also considered are any collection items and other negative factors, such as bankruptcies, foreclosures, lawsuits, liens, etc.
Amounts Owed – 30%
The next most important category is Amounts Owed. Just because you owe on credit accounts doesn’t mean you are high risk or have a low score. What is really taken into consideration is the percentage of your available credit that you are utilizing. If you are using a high percentage of your credit, you will be considered higher risk. In addition to how much of your total credit you are utilizing, other factors that are considered are how many accounts have balances and whether or not consistent payments are being made (for instance, a low credit utilization can be more positive than none at all, as it shows consistent payments).
Length of Credit History – 15%
Generally, a longer credit history will help your FICO score. But this can vary, since it also depends on the rest of your credit report. Your score will consider how long your credit accounts have been established, as well as how long it’s been since you’ve used your accounts. In looking at the length of your accounts, it will evaluate the age of your oldest account, your newest account, and the average age of all your accounts.
Types of Credit – 10%
Your score will also consider the types of credit accounts you have open, and likes to see a good mix of revolving credit accounts and installment type accounts. It isn’t necessary that you have both, and it won’t likely carry much weight in determining your score, but a positive history of both types of credit can help your score by proving that you have experience with more than one type of credit.
New Credit – 10%
This category will affect those with a shorter credit history most, but is important for all to take into consideration. Opening too many new accounts close together can be a red flag and negatively impact your score. Also reviewed in this category are how many recent inquiries you have. However, inquiries usually have very little impact on your score – only the last 12 months are considered and the score does allow for “rate shopping.”