While experts say that at least 50 different kinds of scores are compiled and kept about each of us, the one we hear about most is our “Credit score.” The most popular is the FICO score – the one used by mortgage lenders to decide if you can buy a house, and if so, at what rate of interest.
That score is made up of 5 parts, each with a different degree of importance. In order, they are:
1. 35%- Your Bill Paying History
2. 30%- The credit available to you vs. how much of it you use
3. 15%- How long you’ve had credit
4. 10%- The variety of credit you carry
5. 10%- The number of “hard inquiries” from creditors
Bill Paying History
It’s not surprising that would be creditors put a lot of emphasis on how you pay your bills. High-scoring individuals always pay on time, as agreed. Low scores in this category are the result of late payments, accounts going to collection, foreclosures, and bankruptcy.
The good news is that under the new FICO scoring model, an occasional late payment won’t carry the weight it once did. The people who analyze these figures have come to realize that even the most responsible person can have a late payment when there’s some other kind of crisis in their life – or when the mail is slow.
Credit Available vs. Credit Used
This one is a fine balance – experts say it’s good to have plenty of credit and use only about 10% of it – 30% at the most. Others point out that historically speaking, those with plenty of credit tend to use it.
What really hurts is using your available credit to the maximum – and even using it to the maximum on one credit card while others carry no balance at all.
It is important to use at least some of your credit on a consistent basis, because that demonstrates your ability to use credit well. No use equals no history, and that hurts.
Length of time that you’ve had credit –
Using credit well over a long period of time gives you high marks – especially if you’ve had credit with the same issuer over that of time. This one makes it tough on young people just starting out.
The Mix of Credit
This part of the scoring formula assumes that using a variety of credit well shows that you know how to handle money. So having a mortgage, a car loan, and credit cards is better for your score than having just one kind of experience with credit use.
Inquiries on your Credit Report
Multiple inquiries on your credit report are particularly harmful if you’ve recently had credit problems such as late payments, or a bill sent to collections.
Credit issuers assume that if you’re making application for new credit, you may be looking for a “life preserver” with which to pay other debts.
