That all-important credit score varies between 300 and 850, with the latter number representing a spotless credit history. In the 1980s, the Fair Isaac Corporation came up with the scoring system and what is now the most common method of calculating it. The major credit-scoring agencies -- Experian, Equifax and TransUnion--all use the FICO method, as it is known. The score weighs several different factors in an attempt to predict the chances of a debtor meeting the obligations of a loan or a revolving line of credit.
Payment History
A perfect credit score of 850 is exceedingly rare. In fact, spokesperson Maxine Sweet of Experian said to MoneyCentral, a financial website, that "I've never seen it." To approach that number, you have to have excellent payment history, as the FICO system considers this to be the most important factor, giving it a weight of 35 percent. If you pay late, or don't pay at all and force the account to a collection agency, your repayment history is affected. Bankruptcy can also affect this factor, depending on how recently the bankruptcy occurred.
Loan Rates
The most important reason to strive for a high credit score is to save money on loans. In general, the higher your score, the lower your interest rate on mortgages, auto loans, other consumer loans and credit cards, and the lower your monthly payments. Most experts agree that a perfect score of 850 is not necessary, however, and that people scoring between 775 and 850 get the same rates.
Utilization and History
The utilization ratio--amount of outstanding debt as a percentage of total credit available--weighs 30 percent in the FICO calculation. If your utilization ratio is high, you are close to the maximum available credit you have. That tends to lower your score, as does having an increasing number of cards. Your past history and how long you've been using credit accounts also has something to do with the FICO score. The longer you've been paying down balances, the better a credit rater can predict your future history. "Credit scores love stability," according to an article on NASDAQ.com. "To earn the perfect 850 score, the scoring formula would like to see that all of your credit and loan accounts have been open for 10 or more years." If you've just begun using credit cards, your score will be lower than someone whose had accounts for many years--everything else being equal. This factor weighs 15 percent.
New Credit
Applying for new credit accounts affects your credit score by 10 percent. The FICO scorers make the difference between hard inquiries made by potential lenders and soft inquiries made by you. The more new accounts you're trying to open, the greater the negative impact on your score. Any time you have a hard inquiry, your perfect score of 850 falls out of reach, as this has a temporary negative impact on the score.
Account Types
The final 10 percent factor in the FICO score is an evaluation of the kind of accounts you have open. A mix of installment loans and revolving credit accounts is positive. A single type of high-interest account, such as a credit account without any installment loans, is negative. A perfect score of 850 can only be achieved if you have at least one of each type of account, keep them open and active, and pay them on time every month.
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