Credit scores are important. They are in essence a "debt" score. Why do I say that? Because it tells a lender your capacity to take on debt and your ability to repay the lender back in a timely fashion. But what goes in to that number and how is it calculated? Here, we break down the key factors that affect your credit score, and things you can do to help start or improve your credit over time.
How FICO Scores are calculated
A FICO score is that three-digit number that lenders and credit card issuers use to predict how likely you are to repay them if they grant you credit. The score also impacts the interest rate you will pay on borrowed money.
FICO Scores are calculated from many different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your FICO Scores are calculated.
Your FICO Scores consider both positive and negative information in your credit report. Late payments will lower your FICO Scores, but establishing or re-establishing a good track record of making payments on time will raise your score.
What matters most for FICO score?
Factors Affecting Credit Score
Payment history (35% of your score)
This concerns whether you’ve paid on time. Late payments can ding your score, although 30 days late isn’t as bad as 60, etc. A bankruptcy or accounts in collections could also hurt you.
Amount of debt relative to credit limits (30%)
This is how much of your available credit you are using — the less, the better for your score.
Age of credit (15%)
This refers to how long you’ve had credit and the average age of your credit accounts.
Recent applications for credit (10%)
A so-called “hard inquiry” when you apply for new credit can nick your score for up to six months.
Whether you have more than one type of credit (10%)
Having both installment loans (those with level payments, like a car loan or mortgage) and revolving credit (like a credit card) can help your score.
How to track your score
Several personal finance websites, including Mint.com, CreditKarma, among others, offer free credit scores. Look for a site that also offers free credit report information, as well as goal-setting tools. The best way to achieve and maintain good scores involves consistently paying on time, keeping balances low, and monitoring your scores and reports for signs of identity theft or other trouble so you can address it quickly.