What things lower FICO scores?

Your FICO score is a crucial three-digit number that significantly impacts your financial life. It's used by lenders to assess your creditworthiness when you apply for loans, credit cards, mortgages, and even rental agreements. A low FICO score can result in higher interest rates, loan denials, and limited access to credit. Understanding the factors that lower your FICO score is the first step towards improving and maintaining a healthy credit profile.

The Five Key Factors Influencing Your FICO Score

The FICO score is calculated based on five main categories. Each category is weighted differently, reflecting its relative importance in predicting creditworthiness. Let's delve into each factor and see how it can negatively affect your score.

1. Payment History (35% of Your FICO Score)

Payment history is the single most important factor in determining your FICO score. It reflects your ability to pay your debts on time and as agreed. Negative marks on your payment history can have a severe and lasting impact.

• Late Payments: Even a single late payment, reported to the credit bureaus, can lower your score. The later the payment and the more frequently it occurs, the greater the negative impact. Payments reported as 30 days, 60 days, 90 days, or even later past due will all negatively impact your score.
• Collections: If you fail to pay a debt and it is sent to a collection agency, this will severely damage your credit score. Collections remain on your credit report for seven years, even if you eventually pay them.
• Charge-offs: A charge-off occurs when a creditor writes off a debt as uncollectible. This is a serious negative mark and can significantly lower your FICO score. Like collections, charge-offs remain on your credit report for seven years.
• Bankruptcy: Filing for bankruptcy is one of the most damaging events for your credit score. It can stay on your credit report for up to 10 years, depending on the type of bankruptcy.
• Judgments: If a creditor sues you and obtains a judgment against you for unpaid debt, this will negatively impact your credit score.

2. Amounts Owed (30% of Your FICO Score)

This category reflects the total amount of debt you owe compared to your available credit. It's not just about how much you owe in total, but also how much of your available credit you are using.

• High Credit Utilization: Credit utilization refers to the amount of your available credit that you are using. It's calculated by dividing your outstanding credit card balance by your credit limit. For example, if you have a credit card with a $1,000 limit and a balance of $800, your credit utilization is 80%. A high credit utilization ratio (typically above 30%) signals to lenders that you may be overextended and relying too heavily on credit, which can negatively impact your score. Aim for a credit utilization ratio below 30%, and ideally below 10%.
• Maxed-Out Credit Cards: Maxing out one or more credit cards is a significant red flag for lenders and will almost certainly lower your FICO score.
• High Balances on Installment Loans: While not as impactful as credit card utilization, carrying high balances on installment loans (like auto loans or personal loans) can also negatively affect your score, especially if your total debt load is high.

3. Length of Credit History (15% of Your FICO Score)

This factor considers the age of your oldest credit account, the age of your newest credit account, and the average age of all your credit accounts. A longer credit history generally indicates stability and responsible credit management.

• Short Credit History: If you are new to credit or only have a few credit accounts, your credit history will be short. This can make it difficult to establish a strong credit score, as lenders have less information to assess your creditworthiness.
• Closing Old Credit Accounts: While it might seem counterintuitive, closing old credit accounts, especially those with a long and positive history, can actually lower your credit score. This reduces your overall available credit and can increase your credit utilization ratio. It also shortens your average credit age.

4. Credit Mix (10% of Your FICO Score)

This factor assesses the variety of credit accounts you have, including credit cards, installment loans (like auto loans and mortgages), and other types of credit. Having a mix of credit accounts can demonstrate your ability to manage different types of debt responsibly.

• Lack of Credit Mix: Having only one type of credit account (e.g., only credit cards) might not be as beneficial as having a mix of credit cards and installment loans. Lenders want to see that you can handle different types of debt responsibly. However, don't open new credit accounts just to improve your credit mix; focus on responsibly managing the credit you already have.
• Too Many Credit Accounts of One Type: While a mix is good, having an excessive number of credit cards or installment loans can also raise concerns for lenders.

5. New Credit (10% of Your FICO Score)

This factor considers the number of new credit accounts you've opened recently and the number of credit inquiries on your credit report. Applying for too much credit in a short period can negatively impact your score.

• Applying for Too Much Credit at Once: Each time you apply for credit, a hard inquiry is made on your credit report. Too many hard inquiries in a short period can signal to lenders that you are desperate for credit and may be a higher risk. Be selective about which credit cards or loans you apply for.
• Opening Several New Accounts at Once: Opening multiple new credit accounts in a short period can lower your average credit age and potentially increase your credit utilization, both of which can negatively impact your score.

Other Factors to Consider

While the five categories above are the primary drivers of your FICO score, other factors can indirectly influence your creditworthiness:

• Public Records: Bankruptcies and judgments are part of the payment history component, but their presence on your credit report signifies significant financial distress.
• Errors on Your Credit Report: Incorrect or outdated information on your credit report can negatively impact your score. It's essential to regularly review your credit reports from all three major credit bureaus (Equifax, Experian, and TransUnion) and dispute any errors you find.
• Identity Theft: If your identity is stolen and someone opens fraudulent accounts in your name, it can severely damage your credit score. Monitor your credit reports regularly for any suspicious activity and report any instances of identity theft immediately.

How to Improve Your FICO Score

Improving your FICO score takes time and consistent effort. Here are some key strategies:

1. Pay Your Bills on Time, Every Time: Set up automatic payments or reminders to ensure you never miss a due date.
2. Reduce Your Credit Card Balances: Aim to keep your credit utilization below 30%, and ideally below 10%. Pay down your balances as quickly as possible.
3. Don't Close Old Credit Accounts: Unless you're paying a high annual fee, keep your old credit accounts open, even if you don't use them regularly. This will help maintain a longer credit history and a lower credit utilization ratio.
4. Avoid Applying for Too Much Credit at Once: Be selective about which credit cards or loans you apply for. Spread out your applications over time.
5. Check Your Credit Report Regularly: Review your credit reports from all three major credit bureaus for errors and dispute any inaccuracies you find. You can get a free credit report from each bureau annually at AnnualCreditReport.com.
6. Consider a Secured Credit Card or Credit-Builder Loan: If you have a limited or poor credit history, a secured credit card or credit-builder loan can help you establish or rebuild your credit.
7. Become an Authorized User: Ask a friend or family member with a good credit history to add you as an authorized user on their credit card. Their positive credit history can help improve your score.

The Importance of a Good FICO Score

A good FICO score opens doors to numerous financial opportunities. It allows you to:

• Qualify for Loans with Lower Interest Rates: This can save you thousands of dollars over the life of a loan.
• Get Approved for Credit Cards with Better Rewards: A good credit score can unlock access to premium credit cards with valuable rewards and benefits.
• Secure a Mortgage with Favorable Terms: A higher credit score can help you qualify for a lower interest rate and better terms on your mortgage, making homeownership more affordable.
• Rent an Apartment More Easily: Landlords often check credit scores as part of the rental application process. A good credit score can increase your chances of being approved.
• Lower Your Insurance Premiums: In some states, insurance companies use credit scores to determine premiums. A good credit score can help you save money on your insurance.