Just about everything you do with debt gets tracked by credit reporting agencies on your credit report. Your credit report has information on your credit cards, car loan, student loan and many other types of debt. It will also find out if something goes wrong, like if an account ends up in collections. Because analyzing a credit report can be time-consuming and challenging, credit scoring systems were developed. These systems, the most common of which is the FICO score developed by Fair Isaac Co., sum up all of your credit report in a single, usually three-digit, number. FICO scores have five factors and range from 300 to 850.
According to FICO, the most important component of your FICO score is your payment history. 35 percent of the score generally comes from it. If you pay your bills on time, every time, the payment history portion of your score should stay high. However, even a single late payment can have a big impact on your score. If your score is a 680, a single 30-day late payment could drop it to between 600 and 620, while a 780 score could drop to between 670 and 690.
The next most important part of your score is your utilization, which is 30 percent of the total score. To calculate it, scoring models look at how much you owe relative to your credit limits. According to FICO, 40 to 50 percent utilization is "moderate" while 15-25 percent is "low." People with 785 FICO scores and higher average 7 percent utilization. If a person with moderate utilization and a 680 score maxed out one of his cards, his score could drop from 10 to 30 points, while someone with low utilization and a 780 score could lose from 25 to 45 points.
The Other 35 Percent
The other 35 percent of your score comes from three factors. 15 percent of your score comes from how long you've had credit, both in terms of your oldest account and the average age of your accounts. The remaining 20 percent of the score gets split equally between two factors. Half comes from how many new accounts you've applied for, with too many applications hurting your score, and half comes from looking at your mix of credit accounts, with a good blend being helpful.
Credit Scores And You
When you're relatively new to credit, you're at a disadvantage when it comes to having your credit score measured. Since you haven't had enough time to build a long history, you can lose points in that area. In addition, if you haven't opened a broad range of accounts, you also can lose. The scoring models can also move around how they weight the five factors, making it a little harder for you to predict how your score will develop. Finally, you can't even get a credit score unless you've had at least one credit account open and sending information on you to the credit bureaus for at least six months. The upshot of all of this is that you also don't start out with any problems that time can't solve, so you can build to a good credit score and, by being responsible, hold on to it.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.