There are many myths out there about what goes into a credit score. I’ve heard MANY! However, the truth is, there are only five factors that go into your FICO credit score. In this post, I will go over each of the five factors that make up your credit score.
Payment History
This is the biggest chunk makes your credit score. Nothing can ruin a score faster than a missed payment (or two!). And, unfortunately, it can take many months to regain what was blown by that one missed payment. As you can see, payment history alone makes up over one-third of your credit score. A suggestion that I give all my clients is to automate bill payments. Life can be busy enough, and bill-paying can easily slip your mind.
Credit Utilization Ratio
This is a fancy way of saying, how much credit are you using as opposed to how much is extended to you. For example, if you have $10,000 of credit available and you owe $5,000, your utilization ratio is 50%. The lower this ratio, the better you look to lenders. Thus, your credit score will be higher.
As you can see in the chart above, your payment history and your credit utilization ratio make up about two-thirds of your total credit score. I don’t need to say how important these two factors are! Take care of these two and you should be on your way to improving or maintaining a great one!
Length of Credit History
How long have you had your credit? The longer, the better. Someone with a credit history of twenty years looks better to a lender than someone with a credit history of 7 months. Right? Think carefully before closing any line of credit because this factor may be affected (along with your credit utilization ratio).
Hard Inquiries
I have heard these also called hard hits or hard pulls. Some people believe this has a large effect on their overall credit score. However, as you can see, this makes up only 10%. Yes, the less hard inquiries you have, the better. But having a few on your credit report will not hurt you as much as having a few missed payments. Another thing about hard inquiries is they only stay on your credit report for 24 months. And they only count in your credit score for 12 months. Many people erroneously focus on this when trying to fix their credit score when they really should be focusing on the first two factors I mentioned.
A note about the difference between hard and soft inquiries. Hard inquiries happen when you are actively applying for financing. Hard inquiries affect your credit score. Soft inquiries do not because they are not linked to a specific application for financing. A few examples of when a soft inquiry can happen are when you check your credit score, when an employer checks, or when a company checks (like when you get those “pre-approved” letters in the mail).
Credit Mix
What types of credit do you have? A credit card is different from an auto loan which is different from a mortgage which is different from student loans. Get the picture? If a lender checks your credit, are they going to see a good mix of credit? Or will they see 15 credit cards? Lenders are happier when they see a good credit mix on an applicants credit report.
There you have it. The five factors that go into your credit score. What other myths have you heard about what goes into your FICO credit score? Leave me a comment.
When was the last time you checked your credit report? Did you know you can obtain a free one? Go to www.annualcreditreport.com and download your free credit report. Staying on top of this is so important! It is better to find and fix incorrect information sooner rather than later.
