Your Credit Score: 5 Factors

5 Vital Factors in Your Credit Score

There has been a lot of attention on credit reports this week. Wednesday, Ohio Attorney General Mike De Wine and 30 state attorneys announced a settlement with the three main credit reporting agencies:  Experian, Equifax, and Transunion aimed at protecting consumers.

[Related: 10 Tips To Land A Small Business Bank Loan]

Among the provisions, credit reporting agencies must make the process for handling disputes faster and more efficient. In addition, credit reporting agencies cannot place medical debt on a credit report until 180 days after the account is reported.

“Today is a good day for all consumers. We are announcing a comprehensive multi-state settlement that will help protect consumers from credit reports that are wrong, out of date, or even mixed up with someone elses report, and it will reduce the chance that a consumer is wrongly denied a house loan, a car loan, or even a job, because of an inaccurate credit report,” said Attorney General DeWine said.

This is good news for consumers, A Federal Trade Commission study of the U.S. credit reporting industry found that 5% had errors on one of their 3 major credit reports that could lead to them paying more for products such as auto loans and insurance.

As we wait to see how these new agreements play out, it’s a good time to make sure you understand exactly what’s comprises your credit report so that you can better manage what is without question one of the most important numbers in your financial life: Your FICO (Fair Issac and Company )score.

You have a FICO score at each of the 3 credit bureaus.  FICO (Fair Issac and Company) is the company that actually takes the information in your credit history and puts it into a mathematical formula in order to calculate your credit score.

Lenders use that score to determine if you’re a good credit risk, if they’ll give you a loan, and how much they’ll charge you. FICO scores have a 300-850 range and scores that are 700 or higher are considered strong. It’s estimated that 90% of all of the lenders in the U.S. use FICO scores.

A FICO score is made up of the following 5 components:

  • Your payment history
    35% of a FICO score
    A record of on-time payments increases your credit score, while late payments, bankruptcies and other negative items can decrease your score.
  • How much you owe
    30% of a FICO score
    How much available credit are you using, and on how many different accounts?  FICO considers the number of accounts with balances you have and how much you owe on those accounts. Your score will decrease as what you owe increases compared to your credit limit.
  • New credit
    10% of a FICO score
    Have you opened or applied for a new account recently? This will generally bring down your credit score. When a lender checks your credit history as you apply for a new account, your score may drop by a few points – usually less than five. To avoid lowering your score when you need a loan, focus your rate shopping into a short amount of time (1 month, etc.).
  • Credit Mix
    10% of a FICO score
    If you have a variety of credit types on your credit report (mortgage, credit cards, auto loans, etc.), your score can rise slightly.
  • Length of credit history
    15% of a FICO score
    A lengthy credit history will generally increase your score. Nonetheless, if you manage credit responsibly, you can get a high credit score with a short credit history.

As the nation’s lawmakers work to make sure that consumers are better protected in the credit arena, make some time to make sure that you are doing all that you can to take charge of this important part of your financial life. You can start by getting a free copy of your credit report at annual credit