Your FICO credit score is the 3-digit number that helps financial institutions to assess whether you should be approved for credit or denied, or whether you should receive a low interest rate or a high interest rate. There is an algorithm that generates this score to predict your financial risk. A higher score means that you’re less of a risk and may qualify you for loans with lower interest rates. A low credit score can cause your loan or credit application to be completely denied, or approved with a high interest rate.
90% of all financial institutions use the FICO credit score, so we’ll delve into what makes up this score from the three major credit bureaus: Experian, TransUnion, and Equifax. Credit scores are made up of your payment history, amount of debt you have, length of credit history, types of credit used, and new credit.
- Payment History: This portion makes up 35% of your score. It includes whether you’ve made all of your payments on time. A single delinquent payment doesn’t ruin your credit score, but if they keep occurring, you can be sure to see a drop in your credit score. This part of the report will detail your late or missed payments. Credit lenders and banks want to know that you are good on making payments on time.
- Amount of Debt owed: This portion makes up 30% of the score. A high amount of credit used can show a lender that you’re spending above your means and may be overextended, possibly leading to late or missed payments. This reports your balance on credit cards and on your installment loans, including student loans, car loans, retail accounts, etc.
- Length of Credit History: 15% of your FICO credit score is calculated by this section. Your FICO score looks at how long your accounts have been open, how old different kinds of credit accounts are, and how long it’s been since you’ve used the open accounts.
- Types of credit used: This is 10% of the score. Different types of credit help your credit score. It’s not necessary to have all of them, but having a mix of credit cards, installment loans, mortgage and auto loans can help boost your credit score, assuming that you manage payments responsibly.
- New Credit Inquiries: This is another 10% of your credit score. If you have new accounts and multiple credit inquiries in a short period of time, it can indicate to a financial lender, that you are a greater risk. Lenders might think that you have a need to extend credit and not have the income to match. This represents the risk of late or missed payments. Credit inquiries remain on your credit report for 2 years, so you don’t want to overdo it or else you might find yourself with a slightly lower credit score– being that new accounts are only 10 percent of the score.
Knowing what helps to increase your low credit score can assist you in figuring out the best ways to build up your FICO credit score. It’s important to work on as you gain financial responsibility, so that when you need it, you can qualify for a loan with the best interest rate and lower payments.