The FICO Scoring Model is used by lenders to determine your credit worthiness. The FICO Model compiles data from your credit report in order to determine your actual credit scores. This data is sorted into five different categories.
FICO Break Down:
1. Payment History – 35%
2. Revolving Debt Ratio – 30%
3. Average Age of File – 15%
4. Mix of Credit – 10%
5. Inquiries – 10%
Payment History is the largest component of the FICO Model. This category impacts 35% of your overall credit score. Any late payments, collections, charge-offs, judgments, bankruptcies, and/or tax-liens negatively impact this category. These derogatory items stay on the credit report for 7-10 years, and each type has a different effect on your credit score.
In order to positively affect the Payment History category, it is important to pay your bills on time!
The next largest component makes up for 30% of the FICO Scoring Model. Revolving Debt Ratio, (also known as credit card utilization percentage) is the relative value of the amount of revolving credit owed in relation to the amount of available credit. In other words, it’s the balance of your credit cards divided by the limit. If your Revolving Debt Ratio exceeds 30%, your credit score will be negatively impacted.
For example, if your credit limit is $10,000, keeping your balance at $3,000 will keep your utilization percentage at 30%.
Average Age of File is responsible for 15% of your credit score. This component of the FICO Scoring Model is measured by how long your open accounts have been established and how long it’s been since certain accounts have been used. For this category, FICO considers the age of your oldest account, newest account, and an average age of all accounts.
The longer the credit history, the higher the credit score. However, it is still possible to have a high FICO score without established credit. This will ultimately depend on what the rest of your credit report looks like.
Your Mix of Credit is weighed-in as 10% of your credit score. FICO calculates the different types of credit accounts that you have, and how many of each type.
There are many different types of credit accounts. These include credit cards, retail accounts, installment loans, mortgage loans, and finance company accounts. Having at least four different types will give you a good mix of credit. It is important, however, to only open new accounts as needed, Here’s why:
Inquiries also have an effect on your overall credit score. Inquiries, simply defined as requests for credit, make up 10% of the FICO Scoring Model. Having too many inquiries in a short period of time will have a negative impact on your credit score.
Inquiries stay on your credit report for two years. If you apply for the same type of credit within a two-week period, the credit bureaus will count this as one inquiry. Remember, only apply for new credit as needed. If you don’t need it, don’t apply for it!