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The FICO score is the best-known and most widely used credit score model in the United States . It was first introduced in 1989 by FICO, then called Fair, Isaac, and Company. The FICO model is used by the vast majority of banks and credit grantors, and is based on consumer credit files of the three national credit bureaus: Experian, Equifax, and TransUnion. Because a consumer's credit file may contain different information at each of the bureaus, FICO scores can vary depending on which bureau provides the information to FICO to generate the score.  Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are secret, FICO has disclosed the following components. To be sure it is only a model and there is surely some flexibility among lenders dependent on their specific objectives and their specific financial position. The status of their non-performing loans would be a major concern.

Payment History — 35%

Late payments on bills, such as a mortgage, credit card or automobile loan, will cause your FICO score to drop. The more late payments, and the longer they are past due (30, 60, 90 days), the more your score will suffer. Conversely, bills paid on time will improve your FICO score.


Amounts Owed vs. Credit Available — 30%

Keeping a low ratio of current revolving debt (such as credit card balances) to your total available revolving credit or credit limit will increase your score.

For example, if you have a combined credit card limit of $10,000 and you have only $2,000 in balances, that's a credit utilization ratio of 20 percent, and would be considered a good and reasonable ratio. By contrast, if you have a combined credit card limit of $10,000 and you have $9,500 in balances, that's a credit utilization ratio of 95 percent, and your score would be negatively impacted by it.

The most obvious way to improve this aspect of your FICO score is by paying off debt and lowering your credit utilization ratio. Alternatively, receiving a credit limit increase may also drive down your utilization ratio. For example, if your limit was raised to $15,000 your utilization ratio would drop in both scenarios above, demonstrating that you use revolving credit reasonably. Many experts believe a 20-30 percent credit utilization ratio is best. While opening new lines of credit may have a positive overall effect, opening too many could have a negative impact.


The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on a FICO score. This is a common mistake that many people who are trying to improve their score make. Even worse, if it is an old account being closed, you will be reducing your length of credit which also contributes to your credit score.


Length of Credit — 15%


More  credit history can have a positive impact on your FICO score. A credit card that you have used reasonably for many years, or a car loan that you've demonstrated on-time payments with for several years will make a positive impact. Term loans of several years are better than credit cards.  If all of your credit is newer, it is not seasoned enough to make a positive impact — since you haven't yet demonstrated a history of on-time payments and/or reasonable utilization. Your FICO score will likely increase as the average age of your credit increases.

New Credit — 10%

Hard credit inquiries, which occur when you apply for a credit card or loan (revolving or otherwise), can hurt your score, especially if done in great numbers; often three to five points per inquiry. If you're "rate shopping" for a mortgage or auto loan over a short period, you'll not likely experience a large decrease in your score as a result of these types of inquiries. While all credit inquiries are recorded and displayed on your personal credit reports for two years, their impact decreases at the six-month and one-year marks, rendering them insignificant after a year.

Credit inquiries originated by you (such as pulling a credit report for personal use), an employer (for employee verification) or by companies initiating pre-screened offers of credit or insurance do not have any. impact on a credit score. These are called "soft inquiries" or "soft pulls," and do not appear on a credit report used by lenders.

Types of Credit Used — 10%

You can benefit from having a history of managing different types of credit —installment, revolving, consumer finance, mortgage, etc. A diverse credit history (with on-time payments) shows that you can manage different types of obligations responsibly. A