By Becky House, ACC
Last year Fair Isaac and Company (FICO) released a “new” credit scoring model. The new score is now available through TransUnion and was created to provide lenders a better tool with which to make lending decisions.
Lenders use credit scores to evaluate the probability that a person will repay their debt responsibly and on time. The score is a numerical “grade” of your credit. FICO uses scores between 300 and 850 to indicate a consumer’s level of risk. The lower the score, the more risky someone looks to lenders. Higher scores indicate more reliability in paying and managing your debt in a responsible manner.
According to Myfico.com, the consumer division of Fair Isaac and Company, there are five components that make up a credit score. Here they are listed in order of impact to the score:
- Payment History – 35% of score
- Amounts Owed – 30% of score
- Length of Credit History – 15% of score
- New Credit – 10% of score
- Types of Credit Used – 10% of score
Payment history has the biggest impact on your score. Paying bills on time is critical to maintaining good credit. If you cannot pay a bill on time, contact the lender and set-up a plan to get caught up as soon as possible.
The second biggest influence on your score is how much you owe on your accounts. On debt like credit and store cards, the maximum balance owing should be 30% – 50% or less of the available credit limit. For example, if your credit card has a limit of $1,000, the highest balance you should carry on that card is $500. Any higher and you run the risk of damaging your score.
Length of your credit history and new types of credit refer to how long you have had accounts open or how long it has been since you opened new accounts. These categories also take into account how long the specific type of account has been open. Opening numerous accounts at the same time may appear risky and may reflect negatively in your score. Having an account on your credit report that shows a long history of on-time repayments benefits your score.
The last piece of the score looks at the different types of credit you use. Having a mix of types of credit such as installment loans, credit or store cards, mortgage, and auto loans can be important in showing your ability to handle debt.
Creating and maintaining good credit is a balancing act. Your score reflects only the information found in your credit report, so it is important to check the information in your reports at least once a year through http://www.annualcreditreport.com/ or by phone (1-877-322-8228). For more help understanding your credit score or credit report, contact an accredited credit counselor at 1-888-282-5899 or /. You can also access additional FICO score information at www.myfico.com.