Most people understand how important their credit score is for their lives. But, not many people understand the credit score breakdown. Knowing what goes into a credit score can help you build habits that will lead to a good credit score.
A Little Credit Score Background
There are many different credit scores, but the FICO score is the one most-used by banks and lenders. The FICO score was developed in the 1980s by the Fair Isaac Corporation (that’s how FICO got its name). The Fair Isaac Corporation, which is now also called FICO, worked with the three major U.S. credit bureaus to develop the famous credit scoring method.
Credit scores range from 300 on the low end to a maximum of 850. The average credit score is a 690, a number that represents a good credit history. A 690 is a good credit score for getting approved, but you likely won’t qualify for the lowest interest rates.
The Credit Score Breakdown
The credit score breakdown is fairly simple to understand. There are five key factors that go into a credit score.
Payment history: 35%
Your payment history has the biggest impact on your credit score. Paying your bills on time helps improve your credit score in this area. On the other hand, late payments, and serious delinquencies like debt collection, foreclosure, repossession, bankruptcy, and tax liens will hurt your credit score significantly. Late payments on your debt obligations (credit cards and loans) will hurt your credit score more immediately than late payments on utility payments.
Outstanding debt: 30%
The second biggest factor that goes into your credit score is the amount of debt you have. Your credit score considers the total amount of debt you’re carrying and the relation of your debt to available credit. Your credit score improves when you use only a small amount of your credit limit. Generally, using only 30% of your credit score is best. You can lower your credit utilization – the ratio of your credit card balances to their credit limits – by lowering your balance or increasing the amount of credit available to you.
Length of credit history: 15%
The longer you’ve used credit, the better it is for your credit, especially if you have a positive credit history. The more credit information available on you, the easier it is to predict what you’ll do in the future.
Types of credit used: 10%
There are generally two types of credit: revolving debt and installment debt. Showing that you have experience with both of these by having both credit cards and loans will boost your credit score.
Inquiries from applications: 10%
Applying for new credit can affect your credit score because a record of each credit check goes onto your credit report and is factored into your credit score. Inquiries make up a small part of your credit score and won’t kill your credit score. In addition, only inquiries from applications you made in the past 12 months are factored into your credit score. Checking your own credit does not hurt your credit score.
If you’re working to improve your credit score, a basic understanding of the credit score breakdown will help you know where to focus your efforts.