Late payments can cause significant damage to your credit score, and they stay on your credit report for seven years.
What is a FICO score?
The Fair Isaac Corp., known as FICO, is a company that specializes in what it calls “predictive analytics.” It collects information about several areas of your financial life and by assigning a value to each of five factors, it predicts whether or not you are a good credit risk. The FICO score it assigns you based on its credit analysis offers a quick insight into your creditworthiness, with 300 being the worst credit score and 850 the best.
FICO’s analytics model is the one most commonly used by lenders to determine creditworthiness. Although it is not the only credit-scoring company around, it is the one likely to carry the most weight as you apply for credit. It all begins by FICO gathering your credit information from one of the big three reporting agencies: Equifax, TransUnion and Experian.
These agencies, known as credit bureaus, collect information about your credit, past and present. Their reports include any lenders you might have borrowed from, such as credit card companies, banks, student loan lenders and mortgage companies. They may also include reports from utility and telephone companies. All of this information paints a picture of you as a borrower, noting whether you were late on bills or paid on time, and whether you accessed every bit of credit extended to you or whether you used it judiciously.
Here is where it can get tricky: Each of your credit reports from the three credit bureaus is likely to be somewhat different because not all creditors supply information to all credit bureaus. For example, your bank may report your auto loan payments to only one bureau each month, while your student loans are reported to two others. In addition, if there are negative errors on one of your reports, the score on that report is likely to be lower.
Examples of FICO credit score
There are five factors that go into determining your FICO score, some weighed more heavily than others. Based on information provided by a particular credit bureau, this is what FICO looks for:
- Payment history. The largest piece of your credit score pie, 35 percent of it, is how well you have paid your bills. The more late or missed payments, the lower this part of your score. The more reliable you have been, the higher this portion.
- Amounts owed. Lenders wants to know that you are capable of having credit available to you without using it all at once. If you have a credit card with a $5,000 credit limit, your FICO score will benefit more if you owe $300 rather than $3,000. This information is 30 percent of the credit score pie.
- Length of credit history. Generally, the longer your credit history, the higher your FICO score. It does not represent a huge piece of the pie, just 15 percent, but lenders feel better knowing that you have a long history of repayment.
- Credit mix. When a lender sees that you can handle all types of credit — including a mortgage, car loan, credit cards and any other type of loan – it feels more confident that you will be able to manage their loan. This comprises 10 percent of the credit pie.
- New credit. History has shown that people who open several credit accounts within a short period of time are more likely to default on at least one of them. This is 10 percent of the credit score pie.