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If you’re looking for ways to manage your credit score, you may be confused by unsubstantiated claims that lenders can rate your credit based on non-traditional data such as web browsing history and even social media.
But rest assured; what lenders really care about when they check your FICO® Score is not your social media presence. The question is whether you will pay your bills on time. And when it comes down to it, they consider the following factors to determine if you are a reliable borrower.
Five Factors That Affect Your FICO® Scores.
To understand how lenders rate your credit risk, it’s helpful to understand the factors that affect your FICO® scores. Knowing how these factors work can also help you focus on how to improve your performance over time.
“The most important thing is to understand what influences your result the most. And if you focus on the things that really affect your score, this is where you can really see results,” says Jerry Detweiler, director of education at Nav, a business lending website. “You and I could log into Target today and open a brand new Target RedCard account and the impact on our credit history would probably be different because of everything else in our credit history.”
Payment history – 35% of FICO® Score
The single most important factor on your credit report is how consistently you’ve paid your bills on time over the years.
“Past behavior predicts future behavior. My wife can tell you what I’m going to do next Thursday at three o’clock. I do not know yet. But she would, because she knows how I’m doing, because we’re predictable,” says Rod Griffin, senior director of consumer education at Experian.
“So when we look at how people have managed debt in the past, it can predict how they are likely to manage credit in the future. That’s what it says on your credit report.”
Amounts Due – 30% of FICO® Score
The second most important factor is the size of your debt, especially in relation to your credit limits. This is an idea known as the credit utilization ratio and it is very precise in how you manage your debt.
“If a person has very large balances compared to their credit limits, that’s a strong indicator of risk,” says Griffin. “And logically, the more debt you have, the harder it will be to pay off that debt if you have any problems.”
Length of credit history – 15% of FICO® Score
“If you are just starting out on your credit journey and have a very short credit history, you have nothing to base your decision on,” says Griffin. “So, it’s kind of like a first date. “He seems like a nice person, but I need to get to know him better.”
This is why lenders consider the average age of your accounts. If you’ve managed your credit for three decades, then you have more experience paying bills than a novice.
Credit Mix – 10% of FICO® Score
Another good predictor is whether you can handle multiple types of debt. They generally fall into two groups: revolving loans such as credit cards and installment loans such as mortgages and car loans. Sometimes people may have one type of loan but not another.
“In my experience, this [often] young people who don’t need credit cards, so they use debit cards, but they have student loans. So all they have is probably that installment account in their credit history,” says Detweiler. “Or, conversely, older people who have paid for their house and car and just use a couple of credit cards.”
New Loan – 10% of FICO® Score
You may have heard that recent loan applications can affect your credit score. This is true, but it is not the only one.
“It’s not just about investigations. It also looks at your newly opened credit – how to effectively manage that newly registered credit,” says Griffin.
Alternative data for your credit score
FICO and Experian are leading the way in finding ways to add alternative data to your credit reports and make credit more accessible to the average American. Even so, companies are very careful about what alternative data they use.
“We have a six-point test to make sure any credit score we develop with alternative data meets these requirements,” says Tommy Lee, senior director of scoring and analytics at FICO.
Here are the six points:
- Accuracy: Can the data be manipulated?
- Scale and consistency. Does it collect information about most people?
- Regulatory Compliance: Is it in line with current financial regulations?
- Depth of information: does it include both positive and negative information?
- Predictability: Does it predict how well someone will pay their bills?
- Orthogonality: Does it shed new light on how well someone will pay their bills?
Through this system, alternative credit scoring models such as UltraFICO can analyze information such as how well you manage your bank account and allow it to influence your credit score.
What affects my credit score the most?
There has been a lot of talk lately about new types of data that can be used to create a credit score. Even the Netflix show Black Mirror showed a creepy future in which social media is used as a credit score.
Experts agree that you probably don’t need to fear anything like this anytime soon. The five FICO® score factors are here to stay, with payment history being the most influential.
“Since the FICO® Scores were created over 30 years ago, these five categories have consistently been considered the most important for predicting future repayment behavior. And the relative importance of each category has not changed over time,” Li says.
bottom line
You may see headlines in the news about how the credit score calculation will change, but the reality is that this is not going to happen any time soon. The basic principles remain the same: pay your bills on time, keep your balance low, and don’t ask for a loan you don’t need.
If you do this consistently, you will be able to show your lender that you are a reliable borrower. Fortunately, this is exactly what your FICO® scores already measure.
Editorial disclaimer
The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.
