When it comes to credit scores, FICO is the gold standard. Around 90% of consumer lenders around the country use the FICO credit scoring system to calculate how risky it would be to lend to you.

Drawing on data from your credit reports from the three major consumer credit bureaus – Experian, Equifax and Transunion – the Base FICO Score ranges from 300 (very bad) to 850 (excellent) and has a significant effect on the types of loans offers for which you’re eligible.

The higher your score, the more likely your next loan or line of credit will have a low interest rate, favorable loan terms and perhaps even exclusive rewards if you’re opening a credit card.

The Five Factors

Although FICO hasn’t revealed the exact algorithm it uses to determine consumer credit scores (FICO is legally entitled to protect that proprietary information), it has given consumers a general idea of the five factors that comprise its credit scores.

1. Payment history – 35%

There’s one question a lenders have on their minds when they give someone money: “Will I get my money back?”

Your credit reports contain information about how responsible you are when it comes to making the monthly payments on things like credit cards and loans, so naturally, that information plays a big role in your credit score.

FICO notes that a few late payments won’t automatically ruin your credit score, but even just one missed payment can put a huge dent in it – not to mention the late fees and higher interest rates lenders might charge you.

However, the most dangerous marks to have in this category come in the form of public records. Events such as bankruptcies, foreclosures, public judgments and wage garnishments could leave a serious negative mark on your credit report and lower your credit score dramatically, especially if they are recent.

2. Amount owed – 30%

So you might make all your payments on time, but what if you’re about to reach a breaking point?

The FICO score considers your credit utilization ratio, which measures how much debt you have compared to your available credit limit.

For example, someone who has a balance of $50 on a credit card with a $500 limit will seem more responsible than someone who has $8000 on a credit card with a $10,000 limit.

However, don’t assume you have to have a $0 balance on your accounts to score high marks here. “Having a low credit utilization ratio can be better than having a high one, or none at all,” according to FICO.

3. Length of credit history – 15%

People who have been using credit for a few years are more likely to know how to handle it responsibly compared to someone opening a credit account for the first time. As such, FICO rewards consumers who have been using credit longer.

This is why personal finance experts always recommend leaving credit card accounts open, even if you don’t use them anymore. The account’s age by itself will help boost your score. Close your oldest account and you could see your overall score decline.

4. Types of credit in use – 10%

Although it’s not one of the most significant factors of your credit score, FICO will evaluate the different types of accounts you have open when evaluating your risk.

There are various types of accounts: credit cards, installment loans, mortgages and so on. However, you don’t need to have one of each to max out this part of your credit scores.

According to FICO, having installment loans and credit cards with good payment histories will help boost your score.

5. New credit – 10%

Whenever you apply for a new line of credit, lenders typically do a hard inquiry (also called a hard pull), which is the process of checking your credit information during the underwriting procedure (note, this is different from a soft inquiry, such as when you retrieve your own credit information). For more, read Credit Score: Hard Vs. Soft Inquiry.

Hard pulls can cause a small, temporary decline in your credit score since research indicates you may pose a higher credit risk when you open several new accounts at once.

FICO scores only take into account your history of hard inquiries and new lines of credit for the past 12 months, so try to minimize how many times you apply for and open new lines of credit during that time.

However, rate-shopping and multiple inquiries related to auto and mortgage lenders will generally only be counted as a single inquiry.

The Bottom Line

We may not know the secret formula that determines your FICO credit score, but we do know the general guidelines to getting the highest marks: Make payments on time, be responsible with your debts and be the sort of consumer a lender would want to work with. And to get more information, see Top Places To Get A Free Credit Score Or Report.

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