Your Fair Isaac credit score (FICO score) is crucial in determining the rate at which lenders will loan you money. Since approximately 90 percent of banks use FICO scores to evaluate your credit, it is important to understand the criteria used.

FICO scores range from 300 to 850. A high score indicates you are more creditworthy than people with lower scores. Thus, a high score can earn you lower interest rates because the risk is diminished for the lender. A low credit score points toward possible delinquencies or even default; and, thus a higher interest rate.

The five components of a FICO credit score are: (1) payment history; (2) amounts owed; (3) length of credit history; (4) new credit; and (5) types of credit used. Each one affects your credit score in a different way and to a different degree.

Payment History

Payment history totals 35 percent of your FICO score and includes:

      • Details of specific accounts – credit cards, mortgages, installment loans, etc.
      • Length of delinquencies –i.e., length of time payment went past due.
      • Outstanding balance for delinquencies on all accounts
      • Time period since most recent delinquency
      • Number of delinquencies on all accounts
      • Accounts paid

Amounts Owed

This factors the balances you currently owe and comprises 30 percent of your FICO score. Criteria are:

      • Total number of accounts with outstanding balances
      • Cumulative amount of accounts with balances
      • Proportion of credit used – percentage of available credit to used
      • Proportion of installment loans outstanding

Length of Credit History

The length of your credit history is 15 percent of your score and details:

      • Length of time accounts have been opened
      • Time since last activity for each account
      • Length of time each account has been in use

New Credit

New credit comprises 10 percent of your score and factors in:

      • Number of newly opened accounts and the proportion to previous accounts
      • Recent inquiries on credit
      • Time since accounts have been opened
      • Time since inquiries on credit
      • If past payment problems: re-establishment of positive credit

Types of Credit Used

The remaining 10 percent of your score is determined by the types of credit you have used.

      • The variety of accounts accumulated including credit cards, retail accounts, mortgages, etc.

Understanding how your FICO score will help you determine if a lender is quoting you an accurate interest rate based on your credit history. The difference of just one percentage point on an interest rate, especially a long-term loan, can mean thousands of dollars in savings. High interest charges may result in overwhelming debt that requires some form of debt relief.