What Factors Make Up Your FICO Score

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Your FICO score is single-handedly the most important data point that lenders use to judge your ability and willingness to repay what you've borrowed. Just five factors, the most important of which are whether you make timely payments and your account history, make up all the information that the credit bureaus use to determine your FICO credit score.

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Factors that affect your credit score

The nitty-gritty of the FICO scoring algorithm is kept a secret, but the credit bureaus make enough information available to the public that we have a very good idea of how to get the best possible score.

In the table below, I've listed all the factors that go into your FICO score and ranked them by their impact on your score, based on information obtained from FICO itself. I've also created a column to the right that shows your ability to affect the information that goes into each factor, based on my knowledge of the credit scoring algorithms.

FICO Score Factors

Impact on Your Score

Power to Affect It

Payment history

35%

Low

Amounts owed

30%

High

Length of credit history

15%

Medium

Credit mix

10%

Low

New credit

10%

Low

Most of these factors are self-explanatory, but there are some important nuances that, if you understand them, can help you maximize your credit score so that you're always putting your best foot forward when you apply for credit.

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1. Payment history (35%)

It should go without saying that paying your bills on time is very important to getting a good FICO credit score. Payment history is by far the most important factor in the FICO algorithm, as how you have managed your budget in the past is a very reliable indicator of how you will manage it in the future.

Late payments are the main thing to avoid here. Paying a bill five or 10 days late isn't a problem, as it won't appear on your credit report, nor will it affect your score. What matters is being behind on payments by 30 days or more.

Late payments are broken into four delinquency categories -- 30, 60, 90, and 120+ days past due. With each step up, the delinquency will have a greater impact to your credit score. Paying a bill 59 days late (which is effectively only a 30-day delinquency) is so much better than paying it 60 days late.

Furthermore, payment history is most important when it is most recent. As a general rule, most information, including late payments, falls off your credit report after seven years. That said, a late payment will have much less impact as it ages than it does immediately following the delinquency. (Having a 90-day late payment five years ago doesn't really matter that much if you've been current on your bills ever since.)

Unfortunately, there is little you can do about your payment history, since it would require you to travel back in time. Thus, I've assigned it a "low" rating in the column for your ability to impact this factor of your score. The truth is that no one wants to be late paying a bill; being 30 days late is usually a symptom of a budget shortfall due to an unforeseen financial problem. Life happens.

The most important thing you can do with payment history to keep current on your accounts in the present time. If you have truly bad credit -- a score of 600 or less -- you should consider opening a new "good" account to start building up good marks on your credit report. More on that here

2. Amounts owed (30%)

There are a lot of factors that go into this particular component of your credit score. Officially, FICO says that the factors listed below all go into the 30% of your score that relates to your existing obligations.

  • Amounts owed on all accounts
  • Amounts owed on different kinds of accounts
  • Your credit utilization ratio
  • How many accounts have balances
  • How much you owe on installment debts

It goes without saying that owing your lenders a lot of money is more of a negative than a positive, but the type of loans you have is also taken into consideration. Having a high installment loan balance (mortgages, car loans, or student loans) isn't nearly as bad as having a high balance on a revolving account (credit cards and lines of credit are revolving accounts).

One very big factor here is your credit utilization ratio, particularly as it relates to revolving accounts like credit cards or lines of credit. FICO suggests that a credit utilization ratio of 30% or less is ideal. That means you should try to have no more than $3,000 outstanding on a credit card with a $10,000 credit limit, for example. A higher utilization ratio will negatively affect your score.

I assign the amounts owed factor a "high" rating for your ability to impact what goes into this part of your score. Simply maintaining a credit utilization ratio of less than 30% and carrying balances on a minority of your open revolving accounts go a very long way in helping your score.

Importantly, how much you owe or how many accounts have balances is something that only matters at a single point in time. Thus, paying off your credit cards right now will almost certainly increase your score when the data is updated at some point in the next month.

3. Length of credit history (15%)

This is a simple part of the FICO scoring methodology. According to FICO, the length of your credit history is scored a few different ways by measuring the following factors.

  1. The age of your oldest and newest accounts
  2. The average age of all of your accounts
  3. How long accounts have been established, and how long since you last used certain accounts

Experience is a really important thing. For obvious reasons, someone who has paid their bills on time for one year probably isn't on the same level as someone who has paid their bills on time for 10 years running. There isn't much more to say here -- having experience managing your bills is a good sign for lenders, and thus more experience leads to a higher credit score, all else equal.

I assign this a medium rating for your power to impact the age of your credit history because you can't go back in time, nor can you press fast forward on life to get more credit history. But one thing you can do is keep and maintain at least one account that will serve as the bedrock of your credit report.

One reason I think it's so important to have a credit card is because it will generally stay open as long as you use it to make a purchase at least once a year. Unlike a car loan, for example, which will be paid off in three to seven years and then fall off your report, a credit card account can remain open for decades. 

Pick a good no-annual-fee credit card for this purpose, since you don't want to face the difficult decision of deciding whether it's worth paying $95 every year to keep your oldest account on your credit report. (I have a no-annual-fee credit card for precisely this reason. I call it my "Santa" card, since I use it every December for a small gift purchase to keep the account open. Since I have better rewards cards in my wallet, I have no reason to use it other than to keep it on my credit report.)

4. Credit mix (10%)

Credit mix refers to the different types of accounts that you have. Different types of accounts (credit cards, car loans, and mortgages) are better than having just one type.

Realistically, there isn't much you can do about this part of your report, which is why I assigned this a low rating for your ability to impact this part of your score. You shouldn't take out a car loan you don't need to diversify your credit mix, nor should you buy a home just to get a few incremental points on your score. Credit mix is a byproduct of having a good credit score, not a prerequisite for having a good credit score.

For what it's worth, you can get a superprime 800 credit score just by having a credit card account that you pay on time every month. An 800 credit score is high enough that you could afford to lose 20 or more points and it wouldn't negatively affect your ability to qualify for the best possible terms on any loan whatsoever. (I have an excellent credit score despite the fact that credit cards are the only type of financial accounts I have ever had on my credit report. Having different types of accounts simply isn't necessary.)

5. New credit (10%)

History has shown that people who have recently opened new accounts are more likely to default than people who haven't opened a new account in a long time. Some people simply get in over their heads by borrowing too much, while others know something the bank doesn't (like an impending job loss) so they rush off to apply for as many sources of credit before the bad thing happens.

Whatever the underlying reason, people who have opened more new accounts recently are riskier borrowers than people that haven't. And since the whole point of a credit score is to determine your risk of default, the credit bureaus ding your score temporarily for opening new accounts.

I assign this a low rating for your power to impact this part of your score. If you think you'll be making a big purchase anytime soon (like buying a home in the next year), you shouldn't go applying for a car loan or credit card, anyway. Regardless of how little impact a new account may have on your credit score, being a frequent credit seeker will scare the bank's underwriters to death, and you'll pay for it in the form of wasted time talking to the bank. If you plan on getting a mortgage in the next year or so, save yourself a lot of trouble by avoiding any other credit applications. You'll be glad you did.

That said, you shouldn't avoid borrowing money or opening an account just because you fear the small impact it will have on your score. If you need to buy a car, you need to buy a car. If you can save $2,000 a year by refinancing your mortgage, well, it's smart to take the temporary credit score hit for years of savings. Dollars in the bank are worth more than credit score points, period.

The irony is that having a good credit score is only valuable insofar as you actually use it to get a great deal, like a 0% interest rate on a new car or a killer sign-up bonus on a credit card. 

Having a high credit score you're afraid to show off to a lender is like having a luxury car you're afraid to put miles on. What's the point of having something you're too afraid to use?

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