All this didn't go unnoticed by a firm called Fair Isaac and Company. They developed a risk scoring model in the 1980s, a score that was widely adopted by credit issuers and banks throughout the United States. The FICO score was born. That score, which ranges from 300 to 800, is based on five factors that are considered good predictors of risk.
- Payment history (35%). This factor is given the greatest weight. Lenders want to know how many bills you've paid late and how many were sent to collections. The more recent the problems, the greater the negative impact on your score.
- Outstanding debt (30%). Rule of thumb: keep your credit card balances at 25% or less of their limits.
- Length of time you've had credit (15%). In general, a longer credit history will generate a higher overall score.
- New credit (10%). Opening several new accounts tends to impact your score negatively in the short term.
- Types of credit (10%). Having experience with several types of credit — revolving credit, installment loans, mortgages — can push your score upward.