One important element of taking care of your finances is maintaining a good credit score. From buying a home, to buying a car, to getting an insurance quote, credit drives our ability to make purchases. Credit scores are a historical aggregate measure of how well you repay lenders and creditors. Two primary companies dominate the credit scoring industry: FICO and VantageScore. While VantageScore has made lots of headway over the years, FICO is still the clear market leader.
FICO has two primary scoring models out on the market: FICO 8 and FICO 9 (20+ exist). While FICO 8 is the most widely used, FICO 9 is the most recent version launching back in August of 2014. Without getting technical and discussing credit algorithms, there’s really only 3 key areas of difference. First up is medical collections. FICO 9 doesn’t penalize medical bills in collections as much as other types of debt. FICO discovered the following based on their own research: unpaid medical bills were less of a credit risk than unpaid non-medical bills. The second difference is with paid collections. Unlike FICO 8, FICO 9 omits collections that have been paid in full. Thirdly, rental payment history can be factored into one’s credit score if a landlord reports the payments to a single or all credit bureaus. (*For more on FICO click here.*)
Now that we’ve got some background information on how credit has evolved over the years, let’s dive into the 5 factors that affect your credit score.
Payment History (35% of Credit Score)
Do you pay your bills on time (Ex. utilities)? Stated simply: On-time payments increase your score; late payments lower your score. Payment history accounts for the highest percentage of your credit score.
How Much You Owe (30% of Credit Score)
FICO accounts for the amount of debt you owe, the number of accounts with balances due, and how much of your available credit line you are using (Ex. credit utilization on a credit card). The more outstanding debt you owe, the lower the credit score.
Length of History (15% of Credit Score)
A longer tenured credit history yields a higher score. A shorter history can still be effective with consistent on-time payments
New Credit (10% of Credit Score)
Your credit score will reflect if you’ve recently applied for or opened new credit accounts. Each inquiry surfaces the possibility you could be overextending yourself seeking credit. “Hard Inquiries” come from lenders and creditors (impacts credit score). “Soft Inquiries” come from credit monitoring services and apps (no effect on credit score).
Credit Mix (10% of Credit Score)
The last factor of your credit score is the “mix” of debt types you carry (Ex. mortgage, credit cards, car note, student loan).
Knowing what influences your credit score, you can now take action to improve it. I’m a big fan of the Pareto Principle, also known as the 80/20 Rule. 80 percent of effects come from 20 percent of the causes. Since payment history and amount owed account for 65 percent of your score, I’d focus my efforts on these two areas because they carry the most weight. Oorah!