In my previous two articles, I discussed how your total debt accounts for 30 percent of your score while 35 percent of your credit score is affected by your credit history. Today I’ll discuss the remaining 35 percent of your score; it’s divided into three areas and they’re all just as important.
The Length of Your Credit History is 15% of Your Score
This factor is not to be confused with the 35 percent that is your credit history. What is important here is the length of your credit history. The bottom line: the longer, the better — provided your credit history is good with no late payments. Your payment history is the quality part, while your payment length is the quantity part.
Let’s look at it this way: if you’re choosing a mutual fund to buy into, you look at the track record of the fund; especially how it performed in down times, such as the past recession. Yes, past performance is no indication of the future; however, it is the best place to start, especially when it comes to credit. Research shows people with a perfect score of 850 had an average age of 61 and had their accounts open for decades.
Most credit experts will tell you it’s better to have some history, even with a few blemishes, than no history. Six months is probably the minimum amount of history to have; otherwise, lenders have to guess how well you’ll pay your bills.
Another 10% of Your Credit Score is New Credit Accounts
This is the really simple part; if you open a lot of new accounts all at once, the credit bureaus are going to think that you’re going to run up a lot of charges. They don’t like that and will ding your score for it.
Any account that is less than six months old is considered new. Since there really is no history associated with an account that new, FICO considers it riskier, and thus more likely to be delinquent.
On top of all that, if you have what might be considered too many new accounts, then the thought is that they will be too much to keep up with, and you may miss a payment date.
The answer is to keep new accounts to a minimum; as we discussed in the previous post on total debt, you don’t want to have more than two credit cards.
…And the Final 10% of Your Score is Based on How Often You Use Your Cards
If you’re constantly using your credit cards for everyday purchases, this is a good thing; hopefully you’re racking up points and mileage. However, if you use your card a lot and don’t make timely payments or are carrying a balance (that’s why credit cards are called “revolving credit”), then your score will suffer.
On the other hand, if you use your cards a lot and do indeed pay off the balance and never make a late payment, then your score will be increased.
Now that you know how 100 percent of your FICO score is calculated, you have the ability to increase it. Aim for 850!
The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.