The Five Elements That Go Into Your Credit Score

A credit score is a number that lenders use to determine the risk of lending money to a given borrower. Credit card companies, auto dealerships and mortgage bankers are three common examples of types of lenders that will check your credit score before deciding how much they are willing to lend you and at what interest rate. Insurance companies, landlords and employers may also look at your credit score to see how financially responsible you are before issuing an insurance policy, renting out an apartment or giving you a job.

In the next lines, we will explore the five biggest elementss that affect your score: what they are, how they affect your credit, and what it all means when you go to apply for a loan. You must know these aspects, even if you hire a credit repair company to help you out.

Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. It is designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring.There are a multitude of credit-scoring models in existence, but there is one that dominates the market: the FICO credit score. FICO scores range from 300 to 850, where a higher number indicates lower risk.A consumer has three FICO scores, one for each credit report provided by the three major credit bureaus: Equifax, Experian and TransUnion. Unfortunately, consumers currently have access to only their Equifax and TransUnion FICO scores.

Data from your credit report goes into five major categories that make up a FICO score:


  1. Payment history (35 percent):

According to FICO, past long-term behavior is used to forecast future long-term behavior.FICO keeps an eye on both revolving loans – such as 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.

  1. 2. Amounts owed (30 percent):

The second-most important component of your credit score is how much you owe, because a borrower should maintain low credit card balances. FICO says people with the best scores tend to average about 7 percent credit utilization ratio, but that 10 to 20 percent usage is fine. That rule of thumb applies to each individual credit card as well as the overall level of debt.As you could notice, the first two factors make up nearly two-thirds of your score. So if you pay your bills on time and do not carry big balances, you are two-thirds of the way toward a good credit score.

  1. Length of credit history(15 percent):

It is impossible for a person who is new to credit to have a perfect credit score. A longer credit history provides more information and offers a better picture of long-term financial behavior. Therefore, to improve their credit scores, individuals without a history should begin using credit, and those with credit should maintain long-standing accounts.

4.Types of credit in use (10 percent):

The final thing the FICO formula considers in determining your credit score is whether you have a mix of different types of credit, such as credit cards, store accounts, instalment loans and mortgages. It also looks at how many total accounts you have.

5.New credit (10 percent):

Your FICO score considers how many new accounts you have. It looks at how many new accounts you have applied for recently and when the last time you opened a new account was. The score assumes that if you have opened several new accounts recently, you could be a greater credit risk. People tend to open new accounts when they are experiencing cash flow problems or planning to take on lots of new debt.

About Peter Christopher

Peter Christopher is the Editor to Finance care Guide and a guest columnist for many blogs that deals with financial issues. He has devoted himself to full time speaking, writing and consulting on personal finance management. Visit him on Google Plus and Twitter.