The FICO Credit Scoring System Explained

When it comes to credit scoring systems, FICO is the most widely used by major financial institutions. It is divided into five categories which are used for credit rating. These are: payment history (35%), credit usage (30%), length of history (15%), types of credit (10%), and new credit (10%). Yes, there’s a lot more involved in building good credit than just opening an account and submitting payments on time. In this article, let’s take a closer look at each of these credit scoring categories:

5 Factors that Make-Up your FICO score

1. Payment history. This factor makes up the largest portion of your score. Needless to say, creditors are interested to know how you manage debt and repayment. Do you post your payments on time or are you frequently late in paying off your debts? If you’re aiming for a high score, you should make it a point to submit all your payments on the dot.

2. Credit Usage. How much of your credit card limit do you use each month? Some cardholders tend to max out on their credit lines, especially if their cards have a low rate. However, you should know that even if you are a prompt payer, using up your entire limit can still pull down your credit score. As a general rule, a credit cardholder must keep purchases below 30% of his/her credit line. The same principle applies on loan limits.

3. Length of credit history. How long you’ve been managing credit is another factor considered. This is why college students are encouraged to get a student credit card and start building early credit history.

Needless to say, if you’ve been maintaining good credit for the past 5 years or longer, potential creditors will be more confident in your ability to handle debt. On the contrary, if you’ve just started building your credit history, you may find it more difficult to get approved for a loan application. Still, if you have no credit history, it is never too late for you to start building one.

4. Types of credit. The types of account you have in your credit report can improve your rating. For instance, if you have two credit card accounts, auto loans, and a mortgage loan, you’ll have a higher credit score than with someone who only handles one type of account (ex. credit card). Of course, opening an account is just the first step. In order to build good credit, you need to make sure that all of your accounts are in good standing.

5. New credit. Each time you submit a credit application, the prospective lender or credit card issuer will check your personal credit history. All “hard inquiries” or inquiries made in response to your application will be reflected in your report.

Consumers are warned against submitting multiple applications to different lenders at once as it can send a negative impression and pull down your credit score. Before applying for a loan or credit card, do your research first and submit only once you have made your final decision.


About the Author:

Suzy Vanstrusen is a credit analyst and a writer on the website She has been providing consumers with tips and wise information about credit repair as well as helping you out more with your bad credit loans.  Copyright © 2011

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