FICO: The 5 categories that make up your FICO score

The Fair Isaac Corporation is the company that originated the FICO® score which is widely accepted as the standard measure of credit risk. It is a scoring model that over 2,600 businesses worldwide use to determine your credit worthiness. These businesses include banks, lenders, insurance companies, retail stores, telecommunications companies, and government agencies. Throughout our lives, we’re going to be involved in one way or another with one or all of these institutions, so it will be easier in the long run if you pay attention to your credit record and maximize your FICO® score.

The higher your FICO® score, the easier your financial life will be. Knowing these 5 categories will enable you to maximize your score, be viewed as a good credit risk, achieve the lowest interest rates (saves you money) and maximum lines of credit when you need to borrow money.
#1 – Payment History
Payment history makes up 35% of your total score. Any open line of credit you have will appear on your credit report and if all lines of credit (credit cards, installment loans, retail cards, etc.) are paid and current then you have nothing to worry about here. If a payment on any of your open lines of credit falls outside the 30 day grace period, your credit score could fall as much as 100 points. Yes, you can bring it current again but it takes longer for your score to regain the points loss than it does to lose the points in the first place.

#2 – Amounts Owed
How much you owe to any creditor will have an affect on your score. The question is, what will affect your score positively? On revolving credit accounts, a good rule of thumb is to never use more than 35% of the available credit. If your credit card has a limit of $5,000 then only use $1,750 of it at any given time. This shows potential lenders that you are a disciplined user of credit.

#3 – Length of Credit History
Are you a recent college graduate and just got your first credit card? Maybe you’re a longtime user of credit with established accounts. Throughout your financial life, establish credit lines with the knowledge that the longer good lines of credit are open, the better your score will be. Think twice about canceling old accounts because it may hurt your score. Also, use them periodically to keep them active. Potential lenders like to see that you have a high degree of stability when considering you for a loan.

#4 – New Credit
Tempted to apply for the retail card to get the discount at the counter? The cost of multiple inquiries for different types of credit has the potential to hurt your score. Keep the credit lines to a minimum by passing up the temptation to “save money” at the counter by opening a new credit line. In the long run, it may end up costing you money by giving you a lower credit score and lenders will charge you a higher interest rate on future loans.

#5 – Types of Credit Used
Not all credit is good credit. You can get department store cards, gas cards, consumer finance accounts, mortgages, home equity lines of credit, and the list goes on and on. The best types of credit to have are “major” credit cards like Visa, MasterCard, American Express, or Discover and a mortgage. Stay away from department store cards and gas cards because they usually lead to having too many lines of credit open and lower scores.