Most of us know know that our credit score is important (if you don’t or want a refresher, check out Where Do You Stand When it Comes to Your Credit). A higher credit score can save us thousands and thousands over the course of our lifetime.
But what actually dictates our credit score and how do we increase it? Here are the five components that make up your FICO credit score along with their relative impact. Something to note – the importance of any one factor depends on the overall available information in your credit report and varies case by case.
Payment History 35%: Evaluates the following aspects of delinquent / late payments – how late, how much, how recent and how many.
Amounts Owed 30%: Determines your credit utilization ratio – the amount of debt you have outstanding divided by your credit limits (lower is better).
Length of Credit History 15%: Looks at how long you have had credit (longer history increases your score).
New Credit 10%: Examines how many new accounts you have by type. Inquiries (where lenders make requests for your credit report) can impact your score negatively for twelve months. Note: Checking your own score will not affect your FICO score.
Types of Credit in Use 10%: Considers your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans (more diversification is generally better).