Components of your credit score

By Jeremy Simon

The most frequently used credit score is the Fair Isaac Corp. score (also known as the FICO score), which ranges between 300 and 850.  A "good" FICO score is one that exceeds 750, while a "bad" FICO score is one that falls below 620.  However, what numbers are actually considered good and bad vary by lender.

FICO calculates a borrower's credit score by looking at information from their credit report.  Each of the five components of a FICO score is weighted differently to produce a credit score.  The five components and their respective weightings are:

• Payment history -- 35 percent of the total credit score is based on a borrower's payment history, making the repayment of past debt the most important factor in calculating credit scores.  According to FICO, long-term behavior is used to forecast long-term behavior. 

FICO keeps an eye on both revolving loans like credit cards and installment loans such as mortgages or student loans.  Although the weight of each loan varies between individuals, FICO indicates that defaulting on a larger installment loan like a mortgage will damage a credit score more severely than defaulting on a smaller revolving loan.  One of the best ways for borrowers to improve their credit score as a whole is by making consistent, timely payments.

• Debt amounts -- 30 percent of the total credit score is based on a borrower's total outstanding debt.  Revolving accounts, which allow a consumer to borrow as much or as little as desired up to a limit (versus installment loans where the debt amount is already decided), are more heavily weighted.     

FICO views borrowers who habitually max out credit cards or who get very close to their limits as people who cannot handle debt responsibly.  To boost their credit score, a borrower should maintain low credit card balances, with experts recommending that the amount owed should not exceed 30 percent of the individual's credit limits.

• Length of credit history -- 15 percent of the total credit score is based on the length of time each account has been open and the length of time since the account's most recent action. 

It is impossible for a person who is new to credit to have a perfect credit score, FICO explains.  A longer credit history provides more information and offers a better picture of long-term financial behavior.  Individuals without a history should begin using credit, and those with credit should maintain longstanding accounts.

• New credit and credit mix -- each comprise 10 percent of the total credit score.

Borrowers, even those new to credit, should avoid opening too many credit lines at the same time, since such behavior could suggest they are in financial trouble and need significant access to lots of credit.  FICO suggests that borrowers only take on additional credit when they must have it or when it makes sense financially.

Credit mix is somewhat of a vague category, but experts comment that having both types of credit indicates the borrower can handle all sorts of credit.  According to Fair Isaac, FICO's historical data indicates that borrowers with a good mix of revolving credit and installment loans generally represent less risk for lenders.

Published: March 30, 2007