5 factors determine your FICO score, the key to your financial future

Holly Johnson

Oct 24, 2019, 22:40 IST

5 factors determine your FICO score, the key to your financial future

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The most popular credit score - and the standard in the industry - is the FICO score. This credit score is used by 90% of top lenders around the globe.
Factors that make up your FICO score include your payment history, how much debt you have, the type of accounts you have, the length of your credit history, and how many new credit cards you've applied for recently.
You can improve your FICO score by paying your bills on time, keeping debt balances low, and taking it easy when it comes to opening and closing accounts.
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Unless you still live with your parents and have never applied for a credit card or car loan, you probably already know just how important your credit score is.

After all, having good credit can mean the difference between getting approved for loans and credit cards with the best terms and interest rates - or not being approved at all.

If you do get approved for a loan with poor credit, you could also be stuck paying high interest rates and more fees.

But knowledge is power, and you can help yourself in more ways than one if you know how to pull the strings that keep your credit score in good shape. Because, like it or not, you are the one with all the muscle when it comes to how your score shakes out.

How is your FICO score determined, anyway?

Still, you need to know how to play the game if you want to win. For that reason, it's important to talk about how credit scores are determined.

While there are several different types of credit scores, we're going to focus on the FICO score for the purposes of this piece. The FICO score, which is provided by the Fair Isaac Corporation, is the most popular credit score available now and is reportedly used by 90% of lenders.

So, let's get down to business. Here are the factors used to determine your score over time:

Payment history - 35%

Your payment history is calculated by determining how reliable you are when it comes to making your monthly payments on time.

While never having a late payment can make a positive impact on your score - more than almost anything else - late payments have the potential to do some serious damage.

Amounts owed - 30%

The second most important factor making up your FICO score is the amount of money you owe in relation to your credit limits - a.k.a. how much debt you have.

Lenders tend to see high credit balances as an indicator that you pose more risk as a borrower. For that reason, it's always wise to keep your balances on the lower side. Experian's experts suggest that keeping your credit utilization below 30% is a good move.

Length of credit history - 15%

How long you've had various credit and loan accounts open will help determine the average length of your credit history.

Credit issuers tend to see longer credit histories in a positive light, since this gives them more data on your payment history and general attitude toward debt repayment.

Credit mix - 10%

Your credit mix is determined by considering the different types of accounts you have open, whether that includes installment loans, revolving debt like credit cards, mortgages, and other loans.

Generally speaking, you'll score better in the credit mix category if you have several different types of loans and accounts.

New credit - 10%

If you open a lot of new credit card accounts in a short amount of time, this could temporarily hurt your FICO score. The impact may not last long, however.

Also, note that a single new credit card may not make any impact to your FICO score at all.

How to use this information to your advantage

Now that you know how your credit score is determined, you have the proverbial key to the castle. The factors noted above also show that you're in charge of your credit, and the steps you can take today to improve your score over time.

Some quick credit-boosting tips include:

Pay all your bills on time. Since your payment history is the most important factor that makes up your credit score, paying all your bills on time is crucial. Set up alerts if you need to, and you can even set some bills up on auto-pay. No matter what, make sure you don't get hit with a late payment.
Don't open or close too many cards at once. Opening too many new credit cards can hurt you on the "new credit" front, and closing old cards can shorten your credit history, thus hurting you in that category. The solution: Don't do anything drastic. Don't open a bunch of cards at once to earn credit card rewards, and don't close old accounts you're not using anymore.
Pay off as much debt as you can. Not only can you save money on interest when you reduce the balances on your credit cards, but you can improve your credit score, too. Strive to pay off as much debt as you can, and you'll thank yourself later.

The bottom line

If you feel as if your credit score is out of your control, you are probably wrong. The steps you take - and the ones you don't take -are what will determine your FICO score in the long run.

You may face some obstacles when it comes to improving your credit, but that doesn't mean you shouldn't try. For the most part, you can have a decent score just by paying your bills on time and not racking up a bunch of debt.

Also note that poor credit doesn't have to be forever. While you can ruin your credit if you make too many mistakes, most credit-scoring models give you the chance to redeem yourself slowly over time.