The importance of wise and prudent use and management of credit is critical.Your creditworthiness determines the terms and interest rate of any loans you apply for, and ultimately whether or not a lender will lend to you at all.

You have probably heard of the acronym FICO. FICO stands for Fair Isaac Corporation, the company who provides the majority of credit scoring services in the country today.

FICO credit scores range from 300 to a high of 850. The following chart is a breakdown of credit scores for the U.S. credit population:

% Of Population       Credit Score

2%                                        300 – 499

5%                                        500 – 549

8%                                        550 – 599

12%                                      600 – 649

15%                                      650 – 699

18%                                      700 – 749

27%                                     750 – 799

13%                                     800 – 850

When discussing FICO scores terms in mortgage financing a score of 620 has historically been the dividing line between “bad” and “good”. Financing is possible for borrowers with credit scores below 620, but the interest rate will be higher and the terms more strict.

Various facets of your credit data are more important that other when determining your FICO credit score. The breakdown that follows summarizes the major criteria, and their relative weight in the determination of your credit score.

These percentages are based on the importance of the five categories for the general population. For particular groups – for example, people who have not been using credit long – the importance of these categories may be somewhat different.

PAYMENT HISTORY

Account payment information with such agencies as credit card companies, lenders of installment loans, mortgages, and retailers. This part of your credit score measures your ability to pay on time, and the money you have past due. The presence of adverse public records  such as bankruptcy, judgements, suits, liens, wage attachments, etc., collection items, and/or delinquency or past due items is also a factor

AMOUNTS OWED

Information concerning the total amount of credit you have outstanding, number of accounts, balances on account, and how much credit you have relative to the maximum amount creditors are willing to extend to you.

LENGTH OF CREDIT HISTORY

This factor measures how long your accounts have been open with creditors and lenders. The longer your credit history, the easier it is to accurately identify payment patterns.

NEW CREDIT

The data used here reflects how much credit you’ve applied for lately. The number of recently opened accounts, and number of credit inquiries are key elements.

TYPES OF CREDIT USED

This is the measure of the diversity of credit you have in your portfolio. For example, do you have a mortgage, car loan, and credit cards? The more types of credit you have, the more accurately your score can be determined.

A FICO score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score. The importance of any one factor depends on the overall information in your credit report.

For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO score. Thus, it’s impossible to say exactly how important any single factor is in determining your score – even the levels of importance shown here are for the general population, and will be different for different credit profiles. What’s important is the mix of information, which varies from person to person, and for any one person over time.

Your FICO score only looks at information in your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.

Next week:  How to Improve Your Credit Score.