Before the Fair Credit Reporting Act of 1971, many credit-reporting agencies collected any information they can and sold it to those who are willing to pay for the information. Credit scores weren’t known until the Fair Isaac Corporation (FICO) introduced credit data through three-digit scores. At present, these scores range from 300 to 850 and are available for free. Here’s a breakdown of what goes into a FICO credit score:
Payment History (35%)
Lenders need to know if you’ve paid your previous credit accounts on time. FICO focuses on long-term behaviors to predict your future credit performance. From credit cards to auto financing transactions for bad credit, how you pay is what’s important. Make consistent and timely payments to avoid damaging your credit score.
Credit Utilization (30%)
This focuses on the percentage of available credit that you’ve borrowed. Maintaining a low credit card balance is more ideal than maxing it out, as this shows that you can handle your debts responsibly. According to FICO, the best scores range from 7% to 20%.
Length of Credit History (15%)
FICO credit scores depend on your account’s recent transactions and how long it has been open. It’s advisable to have a long credit history to increase your score. In some instances, you can also get a high score if you don’t use your credit for a long time. This depends on the other contents of your report, though.
New Credit (10%)
For those who don’t have a long credit history, it’s a risk to own multiple credit accounts. If you’re new to credit, don’t open too many credit lines simultaneously. This can affect your score, as it suggests that you’re in a deep financial problem.
Type of Credit (10%)
The score depends on the credit you applied for, whether it’s an auto finance loan for poor credit, mortgage, or retail account. Applying and completing different types of credit shows that you can handle any loan.
Knowing the components of a FICO credit score will help you get a better idea of where to focus your credit-building efforts on. This way, you can balance all the percentages and get a good report for your loan.