When was the last time you checked your personal credit score? If you hesitate to answer, you’re not alone. 60% of American consumers have not checked their credit in the past 6 months, and 18% have never checked their credit scores. On average 24% check their credit “every few months.” according to Next Gen Personal Finance. And a much smaller percentage understand the number behind their credit score.

Of course we don’t blame them! Credit scores are multifaceted and can be complicated when you don’t understand the factors impacting the numbers. But we’re here to make the credit waters clearer. The Fair Issac Corp, or FICO, score is the most commonly used credit score, running from 300 to 850. Read on to understand the 5 categories FICO uses that will make or break your credit score.

 

1. Payment History

Payment history accounts for the most crucial part of your FICO score at 35% of your total score.

Why is it so important? Well, you wouldn’t visit a restaurant that had cases of food poisoning, would you? And you’re more likely to choose a 5-star barber over one who occasionally leaves his customers with bald spots, right? Your credit history functions very similarly.

Payment history accounts for the most crucial part of your FICO score at 35% of your total score.

Payment history shows how you’ve handled debt in the past and helps project how you’ll handle it in the future. This includes revolving trade lines, such as credit cards, as well as installments, such as an auto loan. It’s also important to know that your trade lines are all weighted differently. Defaulting on a larger loan (ie. mortgage payment or student loan) will hurt your credit score far more than a smaller default.

Making consistent, timely payments is one of the best ways to improve your credit score overall.

 

2. Amount of Debt

Your total outstanding debt is highly important when factoring in your FICO score. In fact, it accounts for 30% of your total score.

Your amount of debt is calculated similarly to your payment history as revolving and installment accounts are weighed differently. But when calculating your debt, revolving accounts weigh more. Revolving accounts allow you to borrow as much or as little as you want up to a limit (ie. credit cards).

Because revolving accounts do not have a predetermined amount, they are more risky.  Habitually maxing out credit cards or toeing the line of your limits indicates that your unable to responsibly handle your debt.

To score high in this category, keep your credit card balances low. It’s recommended to keep credit card spending contained under 25% of your credit limits.

It’s recommended to keep credit card spending contained under 25% of your credit limits.

 

3. Length of Credit History

If you’re new to credit, you’re not going to have a perfect credit score.

FICO looks at credit history to predict long-term financial behavior. The more history, the higher they can score you (assuming the other 4 categories are also positive).

FICO looks at credit history to predict long-term financial behavior. The more history, the higher they can score you.

Credit history makes up 15% of your total score. And the best way to improve that 15% is to start (or continue) building that history early! You can start building credit early by simply using a credit card and staying well below the limits.

 

4. New Credit

While on the subject of building credit, we want to caution that opening too many new accounts at once can actually harm your score.

New credit makes up 10% of your total score, as FICO analyzes how many new accounts you choose to open at a given time.

We suggest that you only take on new credit when it makes financial sense for you. Building credit the right way takes time, but it pays off in the long run, reflected in your credit score!

Only take on new credit when it makes financial sense for you.

 

5. Credit Mix

The final 10% of your FICO score is determined by your mix of revolving credit and installment loans.

Having a good mix of both types of credit shows that you can handle all kinds of credit. You are showing your monetary responsibility to lenders. When you have a great payment history across multiple trade lines, from credit cards to auto loans, you prove that you are less risky for lenders.

Having a good mix of both types of credit shows that you can handle all kinds of credit.

 

Action Steps

In closing, if you’re unsure what your credit score currently is, we highly suggest checking it. Knowing your number will be a huge asset to determine where you can grow. This way you can get the best rates for loans, rentals, and even financing for your business!

Be careful to check your credit sparingly. Too many hard credit pulls can decrease your credit score.

The FRCA (Fair Credit Reporting Act) allows individuals to pull their credit report once every 12 months to check for discrepancies, up-to-date information, and even check for identity theft. While this free service does not include the credit score itself, it includes helpful information and is the authorized site for all three major credit bureaus. It’s also considered a soft inquiry, minimally impacting your credit score.

Some banks offer to show your FICO score, and some bank apps have your score built in!

We hope you learned tips on how to improve your credit score. Check out our other blog resources to set your business up for success!