You’re often reminded of how extremely important your credit (aka FICO) score is. Nowadays, your credit score can determine whether or not you purchase a home for your family, insure your vehicle or take a new job. Yes! That’s correct. Employers are checking the credit scores of potential employees as part of the hiring process. Today, it is more imperative than ever to maintain a competitive credit score.
Despite the importance of having good credit, we’ve found that most people fail to understand exactly how their credit score is formulated. They don’t understand the method or formula that determines if their score is raised or lowered.
Because we know knowledge is power, we’d like to share with you five factors that determine your FICO score:
1. Your payment history
Most of your FICO score (approximately 35%) is based on your payment history. When your payments are late or your account is forwarded to a collection agency, your score is negatively affected. And, the longer your account remains delinquent, the damage is done to your credit score.
2. Your total outstanding debt
The total amount of outstanding debt you have will have an effect on your credit score. Actually, it makes up about 30% of your credit score. If the amount you owe on your credit card is close to the limit, your credit score can be lowered. Make sure you do not max-out your credit cards or allow them to exceed the approved limit.
3. Length of your credit history
The length of your credit history will make up 15% of your credit score. The older your account, the more positive it affects your overall credit score.
4. Credit inquiries
Every time you apply for a credit card, loan or insurance, your credit score and/or report is requested by the lender for review. This is called a credit inquiry. The more inquiries you have, the lower your score will drop. Credit inquiries play a 10% role in determining your FICO score.
5. Type of accounts and credit lines
The type of accounts you have is also factored into your credit score. Loans from finance companies and third party lenders can hurt your score, whereas mortgage loans can improve your score. This factor contributes approximately 10% to your credit score.