Fair, Isaac and Company developed the most commonly used score, called a FICO® Score. These scores range from 300 to 850, with a higher number being indicative of less risk. Generally, the higher your score, the easier it will be for you to get a loan or other credit instrument with a low rate of interest. Though each of the three major credit bureaus uses this system, it is sometimes called a Beacon or Empirica score.
When you access all three of your credit reports, you may find that your score is different on each. This is usually because each report contains slightly different information.
Though there are many categories of credit information used to determine your FICO® Score, some are much more significant in their impact than others:
Payment history = 35 percent. The more consistent your payment history, the better your score will be. Recent, frequent, and severe late payments have a particularly strong negative impact. Bankruptcies, judgments, and collection accounts will also lower your score dramatically.
Amounts owed = 30 percent. The amount of outstanding debt you have has a strong impact on your credit score. Carrying high balances, especially if the balances are close to the credit limit, can lower your score.
Length of credit history = 15 percent. Accounts that you’ve had for more than two years will have a more positive impact on your score than newer accounts.
New credit = 10 percent. The type, number, and proportion of recently opened accounts matter to your score, as do inquiries. All mortgage and auto loan inquiries within a fourteen-day period are considered just one for scoring purposes, and any mortgage or auto loan inquiries made within 30 days of an application are disregarded. Neither accessing your own reports nor employment inquiries is factored into your score. “Pre-approved” credit offers have no impact either, unless you actually apply. Working toward reestablishing a positive credit history after past payment problems counts in this section as well.
Types of credit used = 10 percent. Having and using a variety of credit instruments (such as credit cards, retail accounts, installment loans, a mortgage, and consumer finance accounts) responsibly is favorable to your score. It proves that you can handle the different responsibilities that come with each debt type.
Credit scores constantly change with credit activity, and recent events matter more than what happened long ago. While there is no perfect credit score, most mortgage lenders look for a score of at least 620 when considering you for a good loan.