What Makes Up Your Credit Score?

A few days ago I posted about creating credit resolutions for the new year.  I thought now would be a good time to review what makes up your credit or FICO score.

There are five key elements that comprise your credit score: payment history, outstanding debts, credit history age, inquiries, and account types.  Each of these items is weighted differently when calculating your FICO score.  Payment history is 35% of the score, outstanding debt is 30%, credit history age is 15%, and both inquiries and account types are 10% of your total FICO score.

So… what do each of these elements include and more importantly, what’s considered good and what’s bad for each component?

Payment History
Your payment history includes the details of how you’ve been paying your bills - i.e., whether you’ve been paying them on time, or even at all.  Each of your creditors reports your payments as on time or late.  Late payments are reported as being 30-, 60-, 90-, and 120-days late.  After six months of non-payment, many creditors charge-off your account, deeming it as uncollectible.  The more recent the late payments are, the worse the effect it is on your credit score.  Timely monthly payments boost your score in this area.

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Credit Resolutions for the New Year

One way to cut the sting of the post-holiday credit card bills is to set a new agenda when it comes to credit.  So consider the following ideas when setting your credit resolutions for 2009:

Set dates for getting your credit reports: Each year, you should check each of your credit reports from annualcreditreport.com directly.  You should spread out your requests, making requests quarterly so you can catch errors that might come up at different parts of the year and spot identity theft.

Get your credit score once a year: A credit score is a three-digit number that reflects the credit history detailed by a person’s credit report.  Go to www.myfico.com to retrieve your credit score once a year from one or all of the three credit bureaus.

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New Credit Card Rules Will Help Protect Consumers From Higher Rates

New rules for the credit card industry were adopted this week that will provide some relief for consumers.

One of the biggest rules is that credit card companies will not be allowed to raise interest rates on existing account balances.  They will be able to raise rates on future purchases, future advances and new accounts, but not current balances.  Having been a victim of increased rates on credit card balances in the past, I know this will be a big relief for people who carry credit card debt from month to month.

These new rules also prohibit credit card companies from allocating all payments to balances with lower interest rates when a borrower has balances with different rates.  This practice was done to ensure that the consumer paid on the highest interest balance for as long as possible.

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