FICO scores, which are commonly used by lenders to assess an individual’s credit risk, are based on several factors. The FICO score is calculated using the following components:
- Payment History (35%): This is the most significant factor in your FICO score. It assesses your track record of making payments on time. Lenders want to know if you have a history of late payments, bankruptcies, or other negative items. Paying bills on time contributes positively to your FICO score.
- Amounts Owed (30%): This factor considers the total amount of debt you owe, especially in relation to your available credit. It includes your credit card balances, mortgages, auto loans, and any other debts. Lenders look at your credit utilization ratio, which is the amount of credit you’re using compared to your total available credit. Lower credit card balances relative to your credit limits can positively impact your score.
- Length of Credit History (15%): This factor considers how long your credit accounts have been active. A longer credit history can be beneficial for your FICO score. It takes into account the age of your oldest account, the average age of all your accounts, and the age of specific account types.
- Types of Credit in Use (10%): FICO scores also consider the various types of credit accounts you have, such as credit cards, mortgages, auto loans, and installment loans. Having a mix of different types of credit can have a positive impact on your score, indicating that you can manage different kinds of financial responsibilities.
- New Credit (10%): This factor assesses how many new accounts you’ve opened recently. Opening multiple new credit accounts in a short period can suggest financial distress and may lower your FICO score. It also takes into account the number of recent inquiries into your credit report, although inquiries related to checking your own credit report or those from employers are not counted in this category.
It’s important to note that while these are the general categories and their respective weightings used to calculate FICO scores, the exact calculations and weightings might vary based on the version of the FICO scoring model being used by a lender.