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The Anatomy of a FICO Score

Posted on Sep 22, 2011 by Thalia Green
Sep 22

Few numbers will have more impact on your car loan application than your FICO score. A FICO score can tell a lender at a glance whether or not you will be a good credit risk. Most people know that a higher FICO score is desirable, but may not be aware how a FICO score is determined. Here is a breakdown of what factors will impact your FICO score.


1) Payment history on loans
Without question, your ability to make payments on time will impact your FICO score more than anything else. A whopping 35% of your FICO score is determined based on your payment history for other loans. This includes car loans, credit cards, personal loans, mortgages, and even utilities. If your FICO score is low, keeping your payments current is one of the easiest ways to improve it over time.


2) The amount of debt in relation to your income
30% of your FICO score is determined by the amount of debt that you have. For this reason, it's not good to have too many credit cards maxed out, as a high debt-to-income ratio will lower your credit score. Paying off your credit cards and keeping the balances low will definitely help your FICO score improve.


3) Length of credit history
Although it only accounts for 15% of your FICO score, the length of your credit history definitely is important. This is the most frustrating aspect for many young adults as most are working to build a credit history. Secured credit cards can be one way to begin building a small credit history. A secured credit card usually has a smaller balance, which is backed by an account at the same bank where the card is issued. The account is maintained solely for the purpose of insurance for the credit card. Should the customer default on a card payment, the bank can take the money out of the account. However, by keeping monthly payments on the card current, the customer can begin to build a credit history.


4) Number and diversity of accounts
Rounding out the list of factors are the number of accounts and the diversity of accounts. Each of these factors impacts the FICO score by 10%. While you certainly don't want to have too many accounts opened, having a few open can show that more than one lender believes you are a good credit risk.


In a way, all five factors are tied to each other. Ultimately the best way to improve your FICO score is to make regular payments on your current loans, keep your balances on credit cards low, and do not open new loan accounts unless you absolutely need them. These three things will guarantee that your credit score will go up over time. 

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