What makes up a FICO Score?
June 12th, 2007 
As most of you may know already, the FICO Score is what creditors and lenders look at in order to assess the risk of granting credit or lending money. But how does the credit bureaus come up with these credit scores?
Here is the general breakdown of how a FICO Score is extracted from a consumer’s credit report:
- Payment history - 35%
- Amounts owed vs. credit limit - 30%
- Length of credit history- 15%
- New credit - 10%
- Types of credit used - 10%
Your payment history affects your credit the most. This is the main reason why you should always make on-time payments. If that’s not reason enough, think of the late payment fees.
Amount owed vs. credit limit is second most important factor. You should try to keep all your balances to at least below 40% of your credit limit. This will show your ability to manage and maintain your finances responsibly. If you have one or two credit cards that are near maxed out, you should apply for a new card and transfer some of the balance over. Spreading out your balances may help your credit score increase quite significantly in some cases.
Having an established credit history can help improve your credit score. Your credit history is sort of like your financial book report. It helps deliver a measurable assessment of your payment history. For people with little or no credit history, creditors and lenders are not able to properly assess their creditworthiness. This is the reason why first-timers have such a tough time getting deals on mortgages, loans or credit cards.
Believe it or not, obtaining new credit can actually help your credit score. On the same token, applying for credit too often may also hurt your credit. I recommend applying for new credit once every 3 months, but do not exceed this number.
The type of credit you use, makes up 10% of your FICO score. By type, I mean installment or revolving. Installment credit is favored over revolving credit. The main reason for this is that installment credit is scheduled to be paid off within a specified time period, whereas revolving credit has no set timeframe and the balance owed can fluctuate. Common sense would tell you that installment credit is more predictable and less riskier compared to revolving credit.
