What affects your credit score

As I continue on my goal of educating millions about practical steps consumers can take to improve their finances, I often receive questions about what actions have the most effect on a FICO score, the number creditors use to assess risk. 

The five main components of a FICO score are: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%).  As exhibited in the graph to the right, the most important components are payment history and amounts owed, but all components are important factors.   

Recently, FICO, short for Fair Isaac Corporation, launched a web site to help consumers answer questions like: What is a FICO score? How can I improve my FICO score?  Who uses the FICO score?  The web site is one of the most comprehensive and easy-to-follow sites that explain how to ensure your financial well-being.  To find more detailed information, check out the website. 

Read more information on myFICO.com. 

Comments

[FICO Score For Free]

Thanks for telling me how these scores are calculated.

[Rex Murphy]

I liked the explaination of FICO, and the way you broke it down into its component parts. It really draws attention to just how important things like payment history and owned amounts are.

[Bad risk per Progressive Insurance]

We have a single high limit revolving credit card.r Bank. We've paid the bill in full monthly for years. We have never paid a bill late, not even once, own our home outright, have a liquid net worth of millions and have significant incomes.

However, because we pay off our bill every month, Trans Union reports the card as a "charge card," and dings our credit score for failure to have a "revolving credit card," i.e. one that you can carry a balance. This resulted in a 15% higher premium on vehicle insurance from Progressive Insurance, which uses Trans Union credit reports to assess customer "risk." We've never had any auto related claims, no homeowner related claims, nothing. Not only did Progressive refuse to look at this situation, Trans Union still reflects our credit card as a "charge card," even after a written request for investigtion. The credit card company suggested to me that I should consider NOT paying my bill in full so the credit reporting agency would revise their listing as a "credit card," and increase our score (which are well over 750 with all the credit bureaus.)
Requests for investigations from the credit bureaus, complaints to our state insurance commission resulted in no action: I was told the credit bureaus can do whatever they please, using Fair Isaac methodology.
Fortunately, we were able to move our insurance to GEICO which does not use credit scores for insurance underwriting.
Bottom line: if you are liquid, pay all your bills on time, have little or no debt and lots of resources, you are a poorer credit risk than someone who has multiple credit cards with balances. Also, you may be paying more than your fair share for insurance due to credit scores based on invalid criteria.

[TomB]

I've been using MyFico for a few years (excellent!) and it's interesting to see how the scores are affected by how much balance I have on my cards... I normally charge a lot, periodically send in a big check to bring the balance down, and -- predictably, up goes the score. What's interesting is that since I've followed this pattern of running up a balance and then paying it down for 15 years, Experian's computers have never figured out that once a year I pay my balance down to zero, and that the ups and downs of the rest of the year are simply 'noise'. Whenever I want to raise my score, I simply write a big check... gives me a feeling of control, and a lot less respect for Experian's perceptiveness.

[Jackie Aldridge]

I was surprised when FICO called my car loans "finance companies" and said I'd lost points for using them. Actually, I got my loans, for new cars, through my bank and credit union. If you are going to use credit, the two big items are car and house. I'd think it would be more reasonable to lower FICOs for people using credit cards. Practically anything that you put on a credit card could be debited directly from your bank account.

[caremen]

i like to thank your for taking the time t share your story and sharing your knowledge...

[Bob Bowers]

I personally think any of the companies that have the right to make changes to ones credit report should be required to notify us prior to doing so. Our credit report is our property, and as such this should be reflected accordingly. This would at least give us the chance to respond, correct, etc. any problems.

[Keisha]

Thanks, this is just what most people need to know. There are so many myths about what can hurt your credit rating that it's nice to have a clearer undrstanding of how your credit actions really make a difference.

In addition, consumers need to understand what impact is made by opening and closing accounts frequently, keeping open accounts that have a zero balance, how paying off an account affects your score and how soon.... Since there is no exact science to our FICO (one that most normal people can figure out) we need as much info as possible.

Thanks for keeping us informed.

[Derrick L Woods Sr]

Great read sir. I was unaware of these different factors that affect my credit score. Thank you.