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Created by Fair Isaac & Company, your FICO score is one of the most important determinants of creditworthiness and financial future. As critical as your FICO score is to financial health, very few consumers understand the ins and outs of how it works. In this post, we’ll give you some useful tips and little-known information about FICO scores to help you boost your credit score as quickly as possible.
All about FICO
Most lenders use the FICO score to gauge your creditworthiness. This score is a numerical representation of your track record of meeting your financial obligations. In essence, the score is a measure of the risk lenders take in lending money to you. The higher your score, the more likely the lender thinks you are to repay the debt on time. The score is determined using a mathematical algorithm, though the exact formula is not published. However, Fair Isaac does offer a breakdown of the various factors influencing the score. Understanding the breakdown of the FICO score can help you maximize your credit score. Below you’ll find a breakdown of these various components and how they influence your score.
- Payment history. This factor constitutes about 35% of your credit score. To lenders, late payments represent financial strain, and financial strain increases the risk of default on a prospective loan. Consequently, recent late payments can devastate your score.
- Account balances (installment). Thirty percent of your score is determined by the balances of your accounts. Though installment debt is the less important type of account balance, your score will drop initially when you add any installment loan to your credit report, such as a car loan or mortgage loan.
- Revolving account balances. Even if you spruce up your credit report and always pay on time, you still may not have an optimal credit score if the relationship between your account balance and credit capacity is not favorable. You want to access no more than 20%-40% of your credit limits.
- Account age. The age of your accounts will make up 15% of your credit score. Usually, your FICO score increases as the age of your accounts increases. Try to keep new revolving accounts to a minimum.
- New credit & inquiries. This category makes up about 10% of your score. New accounts and applications for credit will both lower your score.
- Type of credit. The kind of credit you have on your report accounts for the last 10% of your FICO score. Usually, FICO likes to see an older mortgage loan, older car loans, and about five or so credit card accounts that you’ve had for over five years.
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