The makeup of your FICO score is broken up into a bunch of major factors: Payment History (35%), Debt Burden (30%), Length of History (15%), Types of Credit(10%), and Recent Credit Searches(10%). Let’s take a look at how these components fit in to creating your overall credit profile.
Your payment history is by and large the largest single component of your FICO score. The best way to think of your payment history is to consider it a track record of all the things you’ve done wrong when it comes to credit and a measure of how you behave when it comes to your debts. You don’t get a boost for paying things on time as much as you get penalized for not doing so. A history marked with negative information would indicate that the person often faces difficulty meeting their debt obligations, or rather someone that has a risky attitude when it comes to their credit. Both are signals to the lender that they may want to be more cautious when it comes to making additional credit available.
The most common problem consumers face in the payment history component is late payments. Whether it was because you simply forgot or were struggling to make ends meet, being late on a monthly payment for your credit card or a loan will usually cause a negative adjustment on your credit score. How much of an impact can also depend on how late you were with the FICO score making larger downward adjustments the later it is. You will see this reflected on your credit report with late payments marked under categories like 30-days or 60-days etc. One thing to be aware of is missed or late payments on what may seem like trivial amounts can be just as damaging.
One major reason for keeping the number of credit cards and accounts you have at a manageable level is to avoid these issues. It’s way too easy to open up a store credit card, make a charge on it and simply forget about the account. Even if you’re making thousands of responsible payments on all your other accounts, forgetting to pay off the $50 you spent on that one off charge can dramatically hurt your credit score.
The other major component category of your credit score is the break up of your existing debt burden including how much you owe in total, what types of loans you have and any other quantitative indicators about your overall debt/credit profile. As an indicator of your creditworthiness how much you owe and how it’s broken up across the different types of loans acts as a signal about your capacity to manage your existing debt.
When it comes to how this plays into your credit score, it’s probably not worthwhile to think of it was higher/lower = better. In all likelihood, the FICO calculation doesn’t evaluate your debt burden in isolation but considers it in relation to things like your payment history. For instance, let’s consider a credit profile of someone who has large amounts of debt but a long and spotless payment history. This might indicate that the person is financially well off and the debt burden is a signal that any additional loans might be obligations they can easily handle.