We’ve been looking a little more closely at the factors that make up a credit score recently. So far, we’ve addressed the following:
Together, these three factors account for 80% of your FICO score. The final 20% of your score consists of two different factors, weighed at 10% each: types of credit you have right now and new credit accounts. Even though these factors aren’t weighed as heavily when figuring your credit score, they are still worth paying attention to.
Types of Credit You Have Now
Your credit history reflects many different types of credit accounts. These types of accounts are broadly categorized as installment accounts and revolving accounts. It helps to understand the difference between these two types of accounts:
- Installment: You receive a lump sum, and then you make regular payments. Auto loans and mortgages are examples of installment loans.
- Revolving: With revolving accounts, you have a limit, and you can borrow up to that limit. As you make payments, the money becomes available for you to borrow again. Credit cards and home equity lines of credit are examples of revolving accounts.
In addition to seeing that you are able to handle a mix of installment loans and revolving credit accounts, your credit score also takes into account where you are getting your loans. A mortgage loan, for example, is more positive than some other types of installment loans. Having a payday loan can subtly lower your credit score by a little bit. Department store credit cards are not viewed as favorably as credit cards issued by major banks. These are items to keep in mind before you apply for credit.
New Credit Accounts
The final factor to consider is new credit accounts. Your FICO score will include new credit accounts, which slightly lower your credit score. On top of being penalized for brand new accounts, you will also be dinged when hard inquiries are made on your account. If several hard inquiries are made on your score in the last year, it can reduce your score. The good news, though, is that credit scoring models often consider that a rash of hard inquiries within a couple of months indicates you are shopping around for a good deal.
A hard inquiry on your credit score is one that you have given permission for. It is an inquiry that you want so that you can receive credit, or be approved for some service, such as cell phone service. A soft inquiry, on the other hand, is not reflected in your credit score. When you check your own credit score, it is a soft inquiry and will not negatively impact your FICO score. Additionally, inquiries made without your permission, such as those made by credit card companies that want to send you a pre-approval letter, are considered soft and won’t harm your score.
Credit Score: Bottom Line
Your credit score is important. If you want to improve your credit score, it is a good idea to understand why it is low, and to focus on your problem areas. The biggest impacts, though, will be made as you pay down your debt and make on time payments.