What Determines Your Credit Score?

Like it or not: How much you pay for credit, and whether you're granted credit at all, depends to an ever-increasing degree on your credit score.

Perhaps the most widely used credit score is the FICO score, named after the company that created it, the Fair Isaac Company (which was not named for a fair-minded guy named Isaac). Using a very complex algorithm formula, based in large part on your credit history, your FICO score supposedly tells would-be creditors how risky it would be if they granted you credit. As your score increases, the risk decreases (although people with high FICO scores may be just as likely to lose their jobsand their ability to pay their billsas those with low scores).

According to a 2008 book called American Credit Repair, here (summarized) are the five main factors that make up your FICO score:

1. Payment history: 35%. Late payments cause the worst damage to your credit report. Timely payments within the past 12 months can help improve your score.

2. Balances: 30%. According to FICO, if you don't pay your balances in full each month, you have a poor ability to manage money. (If you do maintain a balance, it's best to keep it no higher than 30% of your credit limit.)

3. Length of credit history: 15%. The longer you've been with each creditor, the better it looks.

4. New credit: 10%. New accounts will have a negative impact on your score for about six months.

5. Types of credit: 10%. It's better to have a mortgage than a bunch of credit cards, some say. (Probably because there's real property involved.)