FICO Credit Score – 5 Major Factors
The FICO credit score is by far one of the most used credit scores in the industry today. No matter if you’re going to purchase a car or home, it’s very important to manage this score. Neglecting this can lead to lenders assuming you are not financially stable enough for a loan or line of credit. This could be the difference between driving the car you want, or driving only what you can barely get approved for. That’s no fun! Let’s address this now before you even think about your next major purchase.
Here are the 5 factors that weigh into your FICO credit score:
While some sections do outweigh others, you have to maximize your points in all areas to obtain a high credit score. The higher your FICO credit score, the more lenders will trust you and the more you will be approved for when it comes to loans and credit. We are going to break each section down in depth for a better understanding of the ingredients in your FICO credit score.
FICO Credit Score Factor #1: Payment History – 35%
Your payment history is by far one of the most important factors in your FICO credit score. This accounts for 35% of your total credit score. That’s a lot! This includes payments for your car, loans, credit cards and other items that report monthly to the Credit Bureaus. To maximize this score, you should keep track of the following items:
- Pay your bills on-time
- Avoid paying your bills late (if you do, make sure they are NOT more than 30 days late)
- Keep all credit accounts paid on time
- Make sure all of your monthly bills are able to be comfortably paid
- Save to avoid credit problems when dealing with a financial hardship
- Try set payments up to automatically withdrawal from your bank
Keeping these items in check will drastically help your financial future and increase your credit worthiness. This is the most important factor in your FICO score. Do not neglect this area.
FICO Credit Score Factor #2: Credit utilization – 30%
Try to keep your credit card usage to a minimum. If you need to make a purchase, always remember cash is king (well, debit may be “king” soon). If you absolutely do need to use credit, try to pay it off as soon as possible. Try to take the following steps to ensure your credit score will not be impacted by your credit utilization:
- Keep your credit usage per card below 30%
- Avoid spending what you don’t have
- Only use credit for bills and necessities if possible
- Get a credit card only if you absolutely need one
- evaluate your financial situation prior to applying for a credit card
Following those steps will help keep that 30% of your FICO credit score solid. It will also set you up for success in the event that you absolutely NEED to use credit. The impact to your credit score (if any) would be minimal.
FICO Credit Score Factor #3: Age of Credit – 15%
While this credit score factor is not easily modifiable, there are plenty of ways to build this. You don’t have to apply for a credit car perse to build credit history. Simply applying or obtaining an auto loan at a young age would be a great start to creating an aging credit account. This can be done through the following means
- Apply for student loans
- Apply for a credit card
- Make payments on a bill or related item that reports regularly to an account with one of the three major Credit Bureaus.
Following those simple task can pave the way for a very high credit score down the line. While it’s not the biggest piece of the pie in your over FICO credit score, it still has a substantial impact as no credit is almost as bad as “bad credit”.
FICO Credit Score Factor #4: Credit Account Mix – 10%
Having a diverse credit portfolio will make you more attractive to lenders. For example, you should have more on your credit history than just credit cards or auto loans. Mixing it up by having things such as student loans, auto loans and a credit card in conjunction looks a lot better to lenders. Here are ways to address this FICO credit score factor (remember, open these accounts ONLY when necessary):
- Open up an installment loan for a car, home or some other necessity
- Start up a line of credit with a bank
- Sign up for a line of credit with a retailer
While this has very little impact to your score in the grand scheme of things, the goal is always to maximize your points. And once again, I cannot stress enough to only open what you need. The need can be to build credit or a physical need, but do not go overboard.
FICO Credit Score Factor #5: Credit Inquiries – 10%
There are two types of credit inquiries. You have the soft credit inquiry that will not affect your score. Then you have hard credit inquiries that can have up to a 10% affect on your FICO Credit Score. Every time you apply for a loan or a new line of credit, a credit inquiry is applied to your credit profile. These are hard inquiries and will affect your score if you do too many at once. Here is some advice to avoid these hurting your credit score.
- Apply for a loan only after you have done research and are sure the loan is what your want
- Check your credit score and know what you potentially can qualify before a major purchase involving credit
- Research if a company uses a credit check for their financing
These inquiries will only impact your overall score for 12 months. They will fall off of your report altogether in 2 years. Typically inquiries are lumped into on hit if done in a short timespan.
These are the building blocks of your FICO Credit Score. It is very important to pay attention to each factor in order to maximize your points. Set yourself up well for ongoing financial stability and a credit safety net in case the roller coaster of life leads you to financial hardship. If you want to learn how I used this information to repair my own FICO credit score, click here. Also to check your credit score with no hidden fees, check out Credit Sesame. This is one of the few sites that have no hidden fees attached to their reporting. Click Here for more information.