Understanding your credit score can help you manage your credit health.

By knowing how your credit score is determined, you can take actions that may lower your credit risk and raise your credit score over time. A better credit score means more financial options for you.

A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time.  Lenders use your credit score to evaluate your credit report and estimate your credit risk.  Your credit score influences the credit that’s available to you and the terms (interest rate, etc.) that lenders offer you. It’s your score card, and it can make all the difference in the world if you are applying for a loan, credit card, insurance, and even a job.

5 Factors that Make up your Credit Score

The most widely used credit scores are FICO® scores, the credit scores created by Fair Isaac Corporation. Lenders can buy FICO® scores from all three major credit reporting agencies. Lenders use FICO® scores to help them make billions of credit decisions every year. Fair Isaac develops FICO® scores based solely on information in consumer credit reports maintained at the credit reporting agencies. You’ve probably also heard of BEACON scores from Equifax.  FICO® scores are the most widely known and used type of score.  FICO® scores have a 300-850® score range. The higher the score, the lower the risk. But each lender has its own approach to credit scores, including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders.

There are five main factors that go into your credit score:

1) Payment History – Approximately 35% of your credit score is based on this category.

The first thing any lender wants to know is whether you have paid past credit accounts on time. This is also one of the most important factors in a FICO® score. Late payments hurt, but wont destroy your credti score.   An overall good credit picture can outweigh one or two instances of a few late credit card payments.  And by the same token, having no late payments in your credit report doesn’t mean you will get a “perfect score.”  Some 60%-65% of credit  reports show no late payments at all.  Your payment history is just one piece of information used in calculating your FICO® score. Your FICO® score takes into account:

• Payment information on many types of accounts, including (but not limited to):  credit cards, retail accounts (like  department store credit cards), installment loans (loans where you make regular payments, such as car loans), finance company accounts and mortgage loans.
• Public record and collection items-reports of events such as bankruptcies, foreclosures, suits, wage attachments, liens and judgments. These are considered quite serious, although older items and items with small amounts will count less than more recent items or those with larger amounts. Bankruptcies will stay on your credit report for 7-10 years, depending on the type.
• Details on late or missed payments (“delinquencies”) and public record and collection items. The FICO® score considers how late they were, how much was owed, how recently they occurred and how many there are. A 60-day late payment is not as significant as a 90-day late payment.   But the more recent the offense, the more it counts.   A 60-day late payment made just a month ago will affect a score more than a 90-day late payment from five years ago.
• The number of accounts showing no late payments. A good track record on most of your credit accounts will increase your FICO® score.

2) How Much You Owe – Approximately 30% of your credit score is based on this category.

Having credit accounts and owing money on them does not necessarily mean you are a high risk borrower with a low FICO® score. However, when a high percentage of a person’s available credit has already been used, this can indicate that a person is overextended, and is more likely to make some payments late or not at all.

Your FICO® score takes into account:

• The amount owed on all accounts. Note that even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
• The amount owed on all accounts, and on different types of accounts. In addition to the overall amount you owe, your FICO® score considers the amount you owe on specific types of accounts, such as credit cards and  installment loans.
• Outstanding balance on certain types of accounts. In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all. On the other hand, closing unused credit accounts that show zero balances and that are in good standing will not raise your FICO® score.
• Number of accounts with balances. A large number can indicate higher risk of over-extension. How much of the total credit line is being used on credit cards and other “revolving credit” accounts. Someone closer to “maxing out” on many credit cards may have trouble making payments in the future.
• How much of installment loan accounts is still owed, compared with the original loan amounts. For example, if you borrowed $10,000 to buy a car and you have paid back $2,000, you owe (with interest) more than 80% of the original loan. Paying down installment loans is a good sign that you are able and willing to manage and repay debt.

3) Age of your Credit account history. Approximately 15% of your credit score is based on this category.

In general, a longer credit history will increase your FICO® score. However, even people who have not been using credit long may get high FICO® scores, depending on how the rest of the credit report looks. Your FICO® score takes into account:

• How long your credit accounts have been open. Your FICO® score considers the age of your oldest account, the age of your newest account and an average age of all your accounts.
• How long specific credit accounts have been established.
• How long it has been since you used accounts that are “dormant”.

4) New Account Activity – Approximately 10% of your credit score is based on this category.

Research by the credit bureaus shows that opening several credit accounts in a short period of time does represent greater risk, especially for people who do not have a long established credit history. Multiple credit requests also represent greater credit risk. However, FICO® scores do recognize that you may be applying with several lenders at once for a new credit account or are rate shopping for the best mortgage or auto loan.   Multiple inquires for the same type of credit in a short period of time wont hurt your score over the long haul, but may cost you a few points.  Your FICO® score takes into account:

• How many new accounts you have. Your FICO® score looks at how many new accounts you have by type of account (for example, how many newly opened credit cards you have). It also may look at how many of your accounts are new accounts.
• How long it has been since you opened a new account. Your FICO® score may consider this information for specific types of accounts.
• Number of recent requests for credit you have made. Inquiries remain on your credit report for two years, although FICO® scores only consider inquiries from the last 12 months.
• Length of time since credit report inquiries were made by lenders. Whether you have a good recent credit history, following past payment problems. Re-establishing credit and making payments on time after a period of late payment behavior will help improve your scores over time.

5) Credit Mix – Approximately 10% of your credit score is based on this category.

The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not necessary to have one of each, and it is not a good idea to open credit accounts you don’t
intend to use. The credit mix usually won’t be a key factor in determining your FICO® score-but it will be more important if your credit report does not have a lot of other information on which to base a score. Your FICO® score takes into account:

• What kinds of credit accounts you have. Do you have experience with both revolving and installment type accounts, or has your credit experience been limited to only one type?
• How many of each. Your FICO score also looks at the total number of accounts you have. For different credit profiles, how many is too many will vary depending on how the rest of your credit history appears.

Do you know what your credit score is?

You can get a free look at your credit score from several of the sources below.  Several offer deals on free credit scores, monitoring, identity theft protection etc.

• Instant Free Credit Score Check your Credit Score Now and Fix 1 Problem Online for Free Today www.ConsumerDirect.com

• Get Equifax Score Watch Now!

• Credit Crisis Concerns? Get 20% off FICO credit scores now

Once you know your score, check our tips on credit repair to get items removed and boost your score.

Related posts:

1. Credit Score Secret Sauce – How Credit Bureaus Calculate Your Credit Score
2. 8 Ways to Boost Your Credit Score
3. How Foreclosure Impacts Your Credit Score

Tagged as: bad credit, Credit, credit card, credit repair, credit report, credit score, equifax, experian, FICO score, Identity Theft, poor credit

Be sure to check out the latest bank rates, cd rates, mortgage rates and top deals on Rate Nerd.