-
The Fair Isaac Corporation (FICO) calculates your credit score to determine if you are a strong candidate for obtaining a loan. If you are interested in buying a home, getting a new credit card or applying for a business or personal loan, your FICO score will be used to assess your creditworthiness--your ability to pay back the loan in a reasonable amount of time.
Having a strong FICO score makes it easier to obtain credit at a competitive rate, and may even allow you to obtain larger lines of credit in the long-term. Creditors and lenders both use your FICO score to determine if you are a high or low risk candidate for the business transaction.
The FICO score is based on your credit history, and is a compilation of several factors such as: your payment history, outstanding credit, length of credit history, types of credit used, and new credit you've acquired or applied for. - Your payment history is a track record of your ability to pay back your debts. If you have delinquent accounts or a record of accounts that were sent to a collections agency, your FICO score will be negatively affected. Your payment history accounts for approximately 35 percent of your FICO score.
- Outstanding credit accounts for approximately 30 percent of your FICO score and is a record of how much you owe on outstanding accounts. This includes information on installment loan accounts, accounts with zero balances and any credit card accounts you have open.
- The day you were first qualified for a credit card or loan was the day your credit history began. Your length of credit history gives a financial institution an idea of how well you are able to manage credit, and how much time has passed since you've had any type of credit activity on your account. Credit history accounts for approximately 15 percent of your FICO score.
- Open credit card accounts, personal loans or even a mortgage will have an impact on your FICO score. Some types of credit have more weight to a lender than others, so having few revolving credit lines and more secured loans may lead to a better FICO score. The types of open credit lines you have account for approximately 10 percent of your FICO score calculation.
- Your new credit accounts account for 10 percent of your FICO score and are made of any recent credit inquiries and new accounts opened. If you're trying to achieve a high FICO score, it's best to refrain from opening new accounts at least 3 to 6 months before submitting your application for credit.
