What Goes into a FICO Score?

7 04 2011

A credit score is important because it indicates whether one will be granted credit and at what interest rate.  FICO scores are produced via complex methods that indicate whether certain borrowers are creditworthy based on their ability to repay a loan.  The exact statistics used to calculate one’s score are secretive, however Fair Isaac and Company (FICO) published these five indicators:

  • Payment History 35%.  Payment history accounts for 35% of one’s credit score.  How often do you pay bills late?  How many bills are paid late? 
  • Amounts Owed 30%.  How many accounts have balances?  Do you pay your bills in full each month?
  • Credit History Length 15%.  When was your first account opened?  Closing older accounts can have a negative effect on one’s score.  If one is keeping old accounts open, safeguard those cards at home in a safe place.
  • More Debt 10%.  How many new accounts do you have?  Are you constantly opening new accounts?  Avoid opening new accounts because the in-store promotion provides you with an additional 10% off your purchase.  Opening accounts for this reason will negatively affect your score.
  • Credit Types 10%.  Do you have a diversified credit history containing credit, personal loans, mortgage loans, etc.?

Maintaining and monitoring your credit history is extremely important.  A low FICO score will always suggest higher interest rates when you apply for a loan or credit.  Prospective landlords are allowed to pull credit reports and may decide against extending a rental agreement because of a low score.  A low credit score might indicate paying rent may be difficult given the financial situation one is in.

Always monitor your credit report to ensure your credit report is accurate.  If there are errors or discrepancies, dispute them with the credit reporting agencies.  When bills are do try to pay them in full – but most importantly, especially on time.  Avoid the pitfalls of signing up for credit because of store-offered discounts.  Lastly, a low FICO score will be costly in the long-run because of the higher interest rates applied to the low score. 

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