What is a credit score? This may sound like a straightforward question but many of us really don’t fully understand credit scores. Sure, a credit score is a number used to signify our ability to repay debts but, do you know how a credit score is measured? Do you know how a FICO score is determined?
If you’re like the average consumer, the answer is no. Most of us understand the importance of having a good FICO score; however, if you’re looking to improve your credit it’s best to understand the components of a credit score.
The Components of a Credit Score
A FICO credit score is a three-digit number that is used to measure a person’s ability to repay debt. To determine a credit score, the following five components are used:
- Debt History
- Debt Weight
- New Credit
- Length of Credit
- Credit Mix
If your goal is to improve your credit, you should have a clear understanding of what these five components mean.
Debit history is an account of your payments over time and represents 35% of your total credit score. It is important to pay your bills on time because simply missing a thirty-day payment can reduce your credit score by 50 points.
Debt weight is the amount of debt being used in relation to the amount of credit available to you. Debt weight represents 30% of your credit score and consists of items such as student loans, mortgages, and credit cards.
Credit scores can be damaged if you’re utilizing 30% or more of your available credit.
New credit is essentially recently opened lines of credit. It is wise to open new lines of credit over time because establishing multiple new credit accounts at once will reflect negatively on your credit score.
Length of Credit
Length of credit is the amount of time you’ve had an active credit account with a company. Length of credit represents 15% of your total credit score.
Maintaining a good credit history over a significant amount of time is best for a sound credit score.
This component represents a mixture of different types of credit accounts. People with good credit scores generally have a mix of credit accounts, such as student loans, mortgages, and credit cards.