Scoping Out Your Credit Score

The credit score most lenders use today was developed by Fair Isaac Corporation. It's called — the suspense is unbearable — a FICO score. FICO scores range from a low of 300 to a maximum of 850. They're provided to lenders by the three major credit reporting agencies: Equifax, Experian, and TransUnion.

The FICO score evaluates five main categories of information. Some, as you'd expect, are more important than others. It is important to note that:

• A score considers all these categories of information, not just one or two. No one piece of information or factor alone determines your score.

• The importance of any factor depends on the overall information in your credit report. A given factor may be more important for some people than for others who have a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. That is why it's impossible to say exactly how important any single factor is in determining your score.

• Your FICO score only looks at information in your credit report. Lenders often also look at other things when making a credit decision including your income, how long you have worked at your present job, and the kind of credit you're requesting.

• Your score considers both positive and negative information in your credit report. Late payments lower your score, but establishing or reestablishing a good track record of making payments on time raises your score.

• Raising your score is a bit like getting in shape. It takes time, and there is no quick fix. In fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time.

These percentages are based on the importance of the five categories for the general population. For particular groups — for example, people who have not been using credit long — the importance of these categories may be different.

Your payment history

What is your track record for repaying creditors? One of the most important factors in a credit score is your payment history, affecting roughly 35 percent of your score. The first thing any lender wants to know is whether you've paid past credit accounts on time.

Late payments aren't an automatic "score-killer." An overall good credit picture can outweigh one or two instances of, say, late credit card payments. And on the other hand, having no late payments in your credit report doesn't mean you automatically get a great score. Some 60 to 65 percent of credit reports show no late payments at all. Your payment history is just one piece of information used in calculating your score.

In the area of payments, your score takes into account:

• Payment information on many types of accounts: These include credit cards such as Visa, MasterCard, American Express, and Discover, credit cards from stores where you do business, installment loans (loans such as a mortgage on which you make regular payments), and finance company accounts.

• Public record and collection items: These items include reports of events such as bankruptcies, foreclosures, suits, wage attachments, liens, and judgments. They're considered quite serious, although older items and items with small amounts count less than more recent items or those with larger amounts. Bankruptcies stay on your credit report for 7 to 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 such payments were, how much was owed, how recently they occurred, and how many there are. As a rule, a 60-day late payment isn't as damaging as a 90-day late payment. A 60-day late payment made just a month ago, however, penalizes you more than a 90-day late payment from five years ago.

• How many accounts show no late payments: A good track record on most of your credit accounts increases your credit score.

Amount you owe

About 30 percent of your score is based on your current debt. Having credit accounts and owing money on them doesn't mean you're a high-risk borrower who'll receive a low score. However, owing a great deal of money on many accounts can indicate that a person is overextended and is more likely to make some payments late or not at all. Part of the science of scoring is determining how much is too much for a given credit profile.

In the area of debts, your 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, the score considers the amount you owe on specific types of accounts, such as credit cards and installment loans.

• Whether you show a balance on certain types of accounts. In some cases, having a small balance without missing a payment shows that you've managed credit responsibly. On the other hand, closing unused credit accounts that show zero balances and that are in good standing doesn't raise your score.

• How many accounts have balances. A large number can indicate higher risk of overextension.

• 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 percent of the original loan. Paying down installment loans is a good sign that you're able and willing to manage and repay debt.

Length of credit history

How established is your credit history? About 15 percent of your score is based on this area. In general, a longer credit history will increase your score. However, even people who have not been using credit long may get high scores, depending on how the rest of the credit report looks.

In this area, your score takes into account:

• How long your credit accounts have been established, in general. The score considers both the age of your oldest 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 certain accounts.

New credit

Taking on a lot of new debt affects your score, too. About 10 percent of your score is based on new credit and credit applications.

People tend to have more credit today and to shop for credit — via the Internet and other channels — more frequently than ever. Credit scores reflect this fact. However, research shows that opening several credit accounts in a short period does represent more risk — especially for people who don't have a long-established credit history.

Applying for several new credit cards or accounts also represents more risk. However, FICO scores do a good job of distinguishing between a search for many new credit accounts and rate shopping for one new account.

In the area of new credit, your score takes into account:

• How many new accounts you have. The 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. Again, the score looks at this by type of account.

• How many recent requests for credit you have made. This is indicated by inquiries to the credit reporting agencies. Inquiries remain on your credit report for two years, although FICO scores only consider inquiries from the last 12 months. The scores have been carefully designed to count only those inquiries that truly impact credit risk.

• Length of time since lenders made credit report inquiries. The older the lender inquiries, the better. Inquiries more than a year old are ignored. In this case, being ignored is good.

• Whether you have a good recent credit history, following past payment problems. Reestablishing credit and making payments on time after a period of late payment behavior helps to raise a score over time.