In America, there are quite a few numbers that dramatically influence your life: your age, your salary, and your credit score. While your age is permanent and your salary is determined mostly by outside sources, your credit score is entirely controllable.
While it may seem overwhelming trying to understand what your number means to you, having a basic understanding of how the magic number between 300 and 850 is decided makes you more capable of taking your credit into your own hands.
FICO. Most lenders and card issuers in the US use FICO’s tradition model; in fact, FICO’s website boasts that 90% of all lending decisions in the US are based on FICO scores. While the many different factors that go into determining this number are closely guarded, FICO broke down their scoring system into five general components, each with their own weight on your credit score.
Here are the top factors that determine a person’s credit score:
#1. Payment History
This is the top factor in determining your credit score. According to FICO, a person’s payment history makes up 35 percent of their total credit score. Using past long-term behavior, FICO forecasts future long-term behavior. While all types of loans are considered (credit cards, installment loans, mortgages, student loans, etc.), it is the frequency, recency, and severity of reported missed payments that influence each score.
If payment history has been your problem, here is a simple solution: make consistent, online payments, and over time, your score will improve.
#2. Credit Usage
Credit usage is the percentage of available credit that has been borrowed, and it makes up 30% of each person’s total credit score. According to FICO, borrowers who continually max out their credit cards are people who handle debt irresponsibly because borrowers should maintain low credit card balances.
To attain a higher score, borrowers should have a credit usage ratio of less than 6% (spending about $20 on a $300 credit card) and less than $3,000 owed on revolving accounts.
#3. Length of Credit History
Fifteen percent of a person’s total credit score is determined by the length of their credit history. The length of credit history is comprised of two major components: the period of time each account has been open and the length of time since the account’s most recent action.
Those without a credit history can improve their score by beginning to use credit, while those with credit should maintain long-standing accounts with consistent, on-time payments.