Understanding What Impacts Your Credit Score

You know what a credit score is, but do you know how it is added up? The major credit bureaus each use their own variation of the Fair Isaac Corporation’s FICO method. This method breaks your score down into weighted categories, allowing your score to be determined based on the following:

• Payment history. Do you pay your bills consistently and on time? If not, how many times have you been late? Have you ever filed for bankruptcy? These questions are a few of many that make up this category, counting for 35 percent of your score.
• Outstanding debt. What is the total of your remaining car loan balance, mortgage, student loans, etc? This category adds them up. It also takes into account the number of active credit cards in your name and their limits. The closer you are to reaching each card limit, the lower your credit score. This category counts for 30 percent of your score.
• Length of credit. Establishing credit early is important; the longer your credit history, the better your score. This allows credit bureaus to view a lengthy sample of your past transactions. Based on these, they are able to predict your future actions and potential risk. Your credit length represents 15 percent of your score.
• New credit. While many think that too much credit activity can hurt their score, new and continued credit activity will actually produce positive results. Consider activating a new credit card or a line of store credit to help you with this category; it counts for 10 percent of your score.
• Diversification. Any investor will tell you that diversification is the key to smart planning. The same is true for your credit score. If you only have experience with one type of credit account (e.g., major credit cards and department store cards), consider finding other ways to expand your credit, like taking out a loan that you pay back in monthly installments. This category represents 10 percent of your score, and illustrates your willingness to work with different types of credit.

Understanding each item that impacts your credit score is important to taking the first steps to improve your credit score