FICO scores are determined by a number of factors, so let’s get familiar with all of them so you can have the highest score possible!
1. Payment History (35 Percent): Your credit card bill arrives in the mail. Ugh. You look at it and immediately regret paying a little extra for first-class airfare to visit your friend in California. In frustration, you throw the bill in your desk drawer, and then, before you know it, you forget to make your payment. Because you didn’t pay even a fraction of the bill, this missed payment is going to have a negative impact on your FICO score. Payment history takes into account whether you pay your bills on time, and at 35 percent of your score, it’s one of the most important factors in maintaining a high credit score.
2. Amounts Owed (30 Percent): Let’s say you went a little wild with your spending this month, and when your credit card bill comes in, you’re shocked to see the balance due at $650. You’re going to pay your bill, but you can’t afford to pay off the whole balance at once and instead opt to make only the minimum payment asked by the credit card company. Not only are you now in credit card debt, but your FICO score is going to take a hit. Unless you pay off the entire credit card balance each month, your credit score will be affected.
As a simple rule, FICO scores do not take well to credit card debt. Thirty percent of your score is determined by your debt-to-credit-limit ratio or utilization ratio (what you owe over what your available credit line is). A high debt-to-credit ratio lowers your credit score. See the box below for a step-by-step explanation of your utilization ratio.
Computing Your Utilization Ratio
Let’s say you have two credit cards: a Visa with a credit limit of $2,000, and an American Express with a credit limit of $4,000. If you owe $1,000 on your Visa and $3,000 on your American Express card, you have $4,000 of credit card debt, with a total credit limit of $6,000 (the $2,000 Visa credit limit plus the $4,000 American Express limit). To figure out your utilization ratio, simply divide the total debt from all your cards by the total credit limit on all your cards. In this case, it would be $4,000 divided by $6,000, which is 66.6 percent. That’s a very high utilization ratio. Ideally you want this number to be under 30 percent and as close to zero as possible. A zero utilization ratio means you’re not in debt.
3. Length of Credit History (15 Percent): Lenders like to see an abundance of available credit. This is why it isn’t a good idea to close down credit card accounts, even if there is no balance on them. When you close down a credit card account, you are erasing vital credit history from your report.
Let’s say you have three credit cards: one with a $2,000 limit, one with a $4,000 limit, and one with a $3,000 credit limit, totaling $9,000. Let’s also say you owe $1,000 on the first card and $3,000 on the second card but nothing on the third card. You’re $4,000 in debt, and your debt-to-credit-limit ratio is 44.4 percent. But if you close down that third credit card (the one with a zero balance), you now only have $6,000 of available credit instead of $9,000. You still owe $4,000, so your debt-to-credit-limit ratio ($4,000 ÷ $6,000) skyrockets to 66.6 percent.
If you have credit cards that have no balances on them, but you feel tempted to use them to buy things you don’t need, simply cut up the cards rather than close down the accounts.
The actual length of your credit history is out of your control—you can’t just push a button and increase your age. Someone who has had a credit card for twenty years will have a longer credit history than a college grad. The longer you have the card, the better your score is, but it’s only 15 percent of the score, so don’t get too worked up about this.
4. New Credit (10 Percent): You get a credit card offer in the mail and it promises thirty thousand rewards points immediately after you sign up. That sounds great, right? But let’s say you signed up for your third card two months ago. If you open this fourth credit card account, your score will drop by a small amount. A potential lender views you signing up for new credit as a sign that you’re looking to extend your spending habits. That will make it nervous about lending you money.
5. The Types of Credit You’re Using (10 Percent): What kinds of credit do you have and from where? Do you have department or retail store credit cards? Do you have a traditional credit card from a major credit card company? Do you have a mortgage or a car loan?
Don’t worry too much about this section of the score.
here’s how they impact your FICO score:
Department store credit cards are very easy to get, so to a creditor it looks as if you are desperate for credit or were denied a traditional credit card because you didn’t meet the criteria. It is better for the FICO score if you use a card from the major issuers instead of from a department store. Again, we’re not talking about a major impact to your score, but just don’t open up tons of store credit card accounts, okay?
1. You pay your bills late (or not at all)
2. You’re in credit card debt
3. You close down credit card accounts that you’ve had for years
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