Understanding Credit Score Variables

Your FICO credit score is a three-digit number that helps lenders assess your creditworthiness. While the exact formula for calculating FICO scores is proprietary, FICO has disclosed the key factors that influence your score. Here are the main variables that impact your credit score, along with a moderate level of detail for each:

1. Payment History (35%):

   • Payment Timeliness: This is one of the most critical factors. Paying bills on time has the most significant positive impact on your score.

   • Missed Payments: Late payments, defaults, and collections can significantly harm your score.

2. Amounts Owed (30%):

   • Credit Utilization: The ratio of your credit card balances to your credit limits. Keeping this ratio low (usually below 30%) can positively impact your score.

   • Total Debt: The total amount of debt you owe, including credit cards, loans, and mortgages.

3. Length of Credit History (15%):

   • Average Age of Accounts: The longer your credit history, the better it reflects your credit management skills.

   • Oldest Account: The age of your oldest credit account.

4. Credit Mix (10%):

   • Types of Credit: Having a mix of different credit types (e.g., credit cards, installment loans, mortgages) can positively affect your score.

5. New Credit (10%):

   • Credit Inquiries: Each time you apply for new credit, it results in a hard inquiry, which can have a small negative impact on your score if done frequently.

   • New Accounts: Opening multiple new credit accounts in a short period may lower your score.

6. Public Records and Collections (Bankruptcies, Liens, Judgments):

   • Bankruptcy: A bankruptcy filing can have a severe negative impact on your credit score.

   • Liens and Judgments: These can also negatively affect your score.

7. Derogatory Marks:

   • Collections: Accounts sent to collections due to non-payment can harm your credit.

   • Charge-offs: When a creditor writes off your debt as uncollectible, it negatively impacts your score.

8. Credit Age (Average Age of Accounts):

   • The average age of your credit accounts is considered in your score calculation. Older accounts can positively influence your score.

9. Credit Inquiries:

   • Each hard inquiry (such as when applying for credit) can slightly lower your score. However, multiple inquiries within a short time for the same type of credit (e.g., auto loans) are often treated as a single inquiry.

10. Credit Limits and Balances:

    • The ratio of your credit card balances to credit limits (credit utilization) plays a crucial role in your score.

It's essential to note that everyone's credit profile is unique, and the specific impact of these factors can vary based on individual circumstances. Maintaining good financial habits, such as paying bills on time, managing debt responsibly, and avoiding excessive new credit inquiries, can help you maintain or improve your credit score over time. Regularly reviewing your credit reports for accuracy is also important, as errors can negatively affect your score.

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