The Fair-Isaac credit score (FICO) is the most popular credit score used by financial institutions and other firms interested in your financial stability. Its scale ranges from 300 to 850, and since most Americans have a score of 700 or above, people with that magic 700 (or higher) are considered prime credit risks. Your FICO score is made up of a weighted mix of your financial transaction history. Here are the weights (and their explanations).
Payment History (35%)
The first thing any lender wants to know is whether you have paid past credit accounts on time. This helps a lender figure out the amount of risk it will take when extending credit. This is the most important factor in a FICO Score. Be sure to keep your accounts in good standing to build a healthy history.
Amounts Owed (30%)
Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low FICO Score. However, if you are using a lot of your available credit, this may indicate that you are overextended. Banks might interpret this to mean you are at a higher risk of defaulting.
Length Of Credit History (15%)
In general, a longer credit history will increase your FICO Scores. However, even people who have not been using credit for long may have high FICO Scores, depending on how the rest of their credit report looks. Your FICO Score will look at how long your credit accounts have been established, including the age of your oldest account, the age of your newest account, and an average age of all your accounts. It will also factor in how long specific credit accounts have been established and how long it has been since you used certain accounts.
Credit Mix (10%)
FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. However, it is not necessary to have one of each.
New Credit (10%)
Research shows that opening several credit accounts in a short amount of time represents a greater risk, especially for people who do not have a long credit history. If you can avoid it, try not to open too many accounts too rapidly.
FICO is the leading credit scoring model. In 2006, the three major credit bureaus—TransUnion, Equifax, and Experian—joined forces to create VantageScore in order to compete with FICO. The VantageScore 3.0 is used mainly by the credit card and auto sectors while the FICO score is used by the mortgage sector. The weights used by VantageScore 3.0 are similar to the weight of your FICO score. Here are a few facts about credit scores:
- Average FICO Score: 706
- Average VantageScore: 685
- Average U.S. Household Credit Card Balance: $8,602
- Average Annual Percentage Rate on Credit Cards: 17%
- Amount of Time Adverse Info Stays on Your Credit Report: 7 years
Source: FICO, Vantage, Federal Reserve Bank, 2019