The Credit Score (FICO)

How Lenders Measure Trust

Your credit score, or “FICO score,” is a number ranging from 300 to 850 that indicates how well you manage your money and how risky it is to lend to you. It’s calculated based on five factors that are weighed by importance:

Payment History (35%): This looks at whether you have historically paid bills on time. On-time payments signal to lenders that they can rely on you to pay down your debt. Even a single 30-day late payment can damage your score for years. To avoid such deductions in score, set up automatic payments for at least the minimum amount on every account.
Credit Utilization (30%): This criterion looks at how much of your available credit you are using (e.g., if your credit limit is $1,000 and your outstanding balance is $900, lenders see higher risk). Keep your credit utilization below 30% of your limit (ideally below 10% if you can).
Length of Credit History (15%): Longer credit histories show that you are experienced in managing your debt. Open your first credit card account as soon as you can (ideally when you turn 18) and keep it.
New Credit (10%): Opening many accounts suggests an increased risk.
Credit Mix (10%): Having different types of credit (e.g., credit cards, mortgages, auto loans, etc.) shows you can responsibly manage a variety of credit.

Do not overmanage the smaller factors. Pay on time and keep balances low. Over time, your score will improve naturally.

HARD LESSON

Hard Lesson - 27

u/CreditBuilder101 • 5.6k points • 2 days ago

I finally paid off my first credit card I got in college. I felt so proud that I called the bank and closed the account to "celebrate." Then my score dropped 50 points the next month. I didn't realize I had just wiped out my longest credit history and lowered my total available credit (which spiked my utilization). Keep your oldest card open forever, folks. Just buy a pack of gum on it once a year to keep it active.

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