Here are the basic parameters of how FICO credit score is ascertain (based on an article provided by Yahoo). Using the information in a borrower’s credit report, FICO breaks that information into categories.
Here’s a breakdown of the five elements of the FICO score:
1. Payment History: 35 Percent of the Total Credit Score
Based on a borrower’s payment history, making the repayment of past debt the most important factor in calculating credit scores. According to FICO, past long-term behavior is used to forecast future long-term behavior.
2. Debt Amounts — 30 Percent
Based on a borrower’s total outstanding debt. Revolving lines of credit, which allow a consumer to borrow as much or as little as desired up to a limit (versus installment loans where a set amount — say, $20,000 plus interest for a car — is determined at the outset), are more heavily weighted. Credit cards are a type of revolving account.
Since FICO views borrowers who habitually max out credit cards — or who get very close to their credit limits — as people who cannot handle debt responsibly, a borrower should maintain low credit card balances. Experts recommend that the amount owed should not exceed 30 percent of the individual’s credit limits. That 30 percent rule of thumb applies to each individual credit card as well as the overall level of debt.
The final components of a FICO credit score get less weight in the score’s calculation. “The remaining one-third of your score is determined by how long you have managed credit, to what degree you have pursued new credit recently and the variety of credit types you have successfully handled,” Watts says.
3. Length of Credit History — 15 Percent
Based on the length of time each account has been open and the length of time since the account’s most recent action.
4 and 5. New Credit and Credit Mix — Each Comprise 10 Percent
Borrowers, even those new to credit, should avoid opening too many credit lines at the same time, since such behavior could suggest they are in financial trouble and need significant access to lots of credit. FICO suggests that borrowers only take on additional credit when they must have it or when it makes sense financially.
Credit mix, meanwhile, is somewhat of a vague category, but experts say that repaying a variety of debt indicates the borrower can handle all sorts of credit. According to FICO, historical data indicates that borrowers with a good mix of revolving credit and installment loans generally represent less risk for lenders.