Like many of my peers, I am a renter. I recently moved apartments and went through the grueling New York City apartment application process. I was successfully able to find an apartment on my own without a broker (which is a feat in itself). In addition to the laundry list of documents that the management company required with my application, they ran a credit check. At the lease signing, I was bold enough to ask my credit score. Lucky for me, I was pleasantly surprised.
In a past post, I wrote about trying to stay on top of my free credit reportsevery fourth months. The first company I had chosen to request a report from was Equifax, after months of trying to track down my free report online and over the phone, I still have been unsuccessful (I even tried to pay for a report). They may possibly have the worst customer service I have ever dealt with. I won’t give up and will post an update when I can actually get my report from them.
For now, I want to explore the components of FICO scores and how exactly that great score that got me approved for my apartment may have been calculated.
How is my FICO score calculated?
According to Fair Isaac website www.myfico.com, there are 5 main components to a credit score. These components impact my score according to the weight each one carries. These 5 categories are:
- Payment History (35%)
- Amounts Owed (30%)
- Length of Credit History (15%)
- New Credit (10%)
- Types of Credit Used (10%)
This category is the one that comes to mind first. It reflects whether or not bills are paid on time, how many bills have been paid, if there were late payments, how late they were paid, if there are current payments past due, and if bankruptcy proceedings were filed. I got my first credit card in college (around 2003) and have been diligent about paying my balance in full each month and on time. I have benefited from the payment history component of credit scores because although I have a short history (which also comes into play) I have had less opportunities to tarnish it.
This component is where the ever mysterious Debt to Credit ratio come into play. In that previous post, I discussed the equation to calculate the Debt to Credit ratio, how cancelling an old credit card affects the ratio, a rule of thumb I like to use, and even calculated my own ratio. In addition to the Debt to Credit ratio reflecting proportionate use of accounts, the amounts owed category incorporates data regarding the number of accounts with balances, amount owed on these accounts and whether these are a specific type of account (i.e. revolving credit, installment loans, etc.)
Length Of Credit History
This category is one that is both easiest and hardest to conquer. The easy part – leave all open accounts open for as long as you can. For these accounts, try to have at least some activity periodically. I have a credit card that only has my monthly cell phone bill automatically charged to it. Something is better than nothing.
For my young professional target audience, this category can also be difficult to conquer. I got my first credit card in 2003. Considering its only been 6 years, its going to be a long time before I have 20 years of credit history. The credit bureaus view my good but short history to be risky because they can’t predict how the next 10 years will turn out.
This component not only involves the number of recently opened accounts that exist (I consider recent to be within the past year), but also the number of recent credit inquiries. I once heard a story about someone going from one bank to another to compare mortgage rates, only to find the rate was getting worse with each new bank. The morale of the story was that each new bank he visited, created a new recent inquiry on his credit report, thus lowering his score. Whether this is accurate or not, I do not know.
What I do know, is that too many credit inquiries can be seen as risky. For example, I participate in Lending Club and the credit information provided of the borrowers includes credit inquiries as a factor for me to assess. The new credit component of FICO scores not only considers how many recent inquiries I have, but also how recent they are and for what types of credit. This component is easy to forget when deciding on opening a retail store charge card.
Types of Credit Used
I found this category to be the most interesting. FICO scores are affected by what different types of credit we use (ex. credit card, retail card, installment loan, or mortgage). A couple years ago, I signed up for one of those 30 days trials from a credit bureau which showed me my report, my score, and how to improve my score. The report instructed me to open an additional revolving account. It said my current credit card did not have enough history at the time, and that it would be beneficial to leave that card open as well as obtain another card. I followed the instructions and subsequently saw that my score increased the following year. I’m sure that wasn’t the only factor involved and others may not see the same results I did, but it was still interesting.
These areas components of the FICO score are nothing to dwell about, but are helpful when making important credit related decisions.