There are several different types of credit scores, however the most commonly used score is the FICO score. It was developed by the Fair Issac Company and used to determine whether or not it is risky to extend credit to you. Your FICO score calculation is dependent on 5 different factors:
Graph of how your FICO credit score is calculated.
- Payment History (35%): The first and most important thing anyone looking to lend to you wants to know is if you have been paying your bills. More importantly, how your bills have been paid in the past: late payments, collections, and bankruptcies.
- Amounts owed (30%): One word: credit utilization. Credit utilization is a ratio between the balances on your accounts in comparison to your credit. The smaller the ration, the lower your score will be. It is recommended to keep your balances at about 30% of your limit.
- Length of credit history (15%): Basically, the longer you have used credit, the more lenders have to analyze your spending habits.
- New credit (10%): Credit crazy? When you open several accounts in a short period of time, it has been known to look a little bit riskier, especially if you don’t have a long credit history.
- Type of credit (10%): This isn’t significant in factoring your credit score, but it does show that you can handle a mix of different types of credit such as credit cards, installment loans, finance company accounts, and mortgage loans. It is important to not open accounts just to have a mix of credit – you should open them on a needed basis.