What exactly makes up your credit score and how can you improve it?

What are the components that make up your credit score?  What can you do to improve your credit score?  This article (courtesy of information made available through MyFico.com... see reference at right under "Elsewhere on the Web") will try to answer those questions.  For more detailed information on the origination of credit scoring along with the value and drawbacks of credit scoring, I suggest some of the articles referenced in the upper right section of this page under related resources.

MyFico states that, "Your credit score changes whenever your credit report changes. But scores do not change month to month that much.  In a given 3 month time period, only 1 in 4 people has a 20-point change in their score." 

Fico scores consider 5 main categories for scoring consideration and are weighted according to importance: Payment History -35%;  Length Of History -15%;  Amounts Owed -30%;   New Credit -10%; Types of Credit -10%.  Though a credit score takes in all the categories for its score, it is possible that different consumer groups could be rated slightly differently.  For example, a new consumer to the credit world might be weighted differently than an established long term credit consumer.

With that in mind, here are the suggested categories expanded along with tips to increase your scoring potential within each category.

Payment History - is the most heavily weighted section of your credit score and constitutes 35%.

Pay your bills on time. The longer your history of on time payment, the better your score.  If paying off a collection account, or closing an account on which you previously missed a payment, be aware that any negative comment in  association with such delinquencies  will remain on your credit report for 7.5 years.

Although this reflects your past credit pattern, the longer the time since the discrepancy the less the impact on current credit score. Additionally your credit score will be impacted more dramatically depending on how late the payment was.  Was it 30 days, 60 days, 90 days?

Per MyFico, "A 60-day late payment made just a month ago will affect a score more than a 90-day late payment from five years ago."  All items are relative to the amount of time past.  In  addition to currency, how many accounts were late, by how much, and when.  If there was one 90 day late five years ago, that is far less troublesome then 3-30 days late last month.

If you cannot make a payment, contact your creditors or see a legitimate credit counselor. Though taking such action won’t improve your score immediately,  your score will get better over time if you are able to correct the situation.  Please note credit counselors normally do not report to credit bureaus, however creditors sometime do.

Length of Credit History -  is about 15% of your score. 

As a general rule, the older the account, the higher the score. But the scoring process views not only your oldest accounts but the average age of all of your accounts.  So if you feel a need to close an account, close the newest first.  Also taken into account is how long it has been since you used certain accounts.

On the other side of the coin, it simply makes good sense that your score will be lowered if you suddenly open a lot of new accounts. This happens quite often when a person gets their first credit card.  Ego takes over and all incoming offers of new credit cards are accepted.  Then when applying for a car or home, the neophyte learns their credit score has suddenly gone south and favorable rates have disappeared.

 Continue on to page 2 to learn more of the other 50% of your credit score.

The other 50% of your score and FICO conclusions

Amounts Owed -   30% of your score is based on the amounts you owe.

Owing a great deal on credit cards does not mean you are a high-risk category requiring a low score. On the other hand this is a possibility especially if there are numerous accounts and the payment history is poor.

Part of the science of scoring is determining how much is too much for a given credit profile.  Your score takes into account the amount you owe on pecific types of accounts, such as credit cards and installment loans.

In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all. On the other hand, closing unused credit accounts that show zero balances and that are in good standing will not raise your score.  Similarly a large number of account balances can indicate higher risk of over-extension. 

Also how  much of the total credit line is being used?  Many authorities seem to feel 40%-60% of maximum is ideal. Another question is, what types of accounts are showing?  Are they mortgage loans, credit cards, retail outlets?  And with  installment loan accounts (car, furniture etc.) how much  still owed compared with the original loan amounts can be important? Paying down installment loans is a good sign that you are able and willing to manage and repay debt.

So keep balances low on credit cards and other “revolving credit.” Pay off debt rather than transferring balances.   According to MyFico.com, "The most effective way to improve your score in this area is by paying down your revolving credit.  In fact, owing the same amount but having fewer open accounts may lower your score."  Don’t close unused credit cards as a short-term strategy to raise your score but don’t open a number of new credit cards just to increase your available credit.

New Credit Accounts - 10% of your score. 

According to Fair,Isaac, "... research shows that opening several credit accounts in a short period of time does represent greater risk—especially for people who do not have a long-established credit history. Multiple credit requests also represent greater credit 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."

It should be noted that although credit inquiries remain on your credit report for two years,  only the last 12 months are considered. It also should be noted that multiple inquiries such as for a car loan within a 14 day period are counted as one inquiry only.  Similarly requesting your own credit report does not constitute an inquiry.

Types of Credit in Use -  will constitute the last 10% of your score.

Types of credit (or credit mix) include credit from retailers, finance companies, installment loans, and mortgagors. According to MyFico.com, "Credit mix is not usually a key factor in determining your score—but it will be more important if your credit report does not have a lot of other information on which to base a score." Therefore such issues as kinds of credit and how many of each is used to establish this score.

In conclusion - At MyFico.com, you will find the following table entitled, "How Do People Score?" (based on the general US population’s FICO scores).

• Above 780 .... 20%
• 740 to780  .... 20%
• 690 to 740 .... 20%
• 620 to 690 .... 20%
• Below 620  .... 20%

You will also find the following: "FICO scores provide the best guide to future risk based solely on credit report data. The higher the score, the lower the risk. But no score says whether a specific individual will be a 'good' or 'bad' customer. And while many lenders use FICO scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single 'cutoff score' used by all lenders."