Why lenders use these 5 factors to best measure your credit risk

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Edited by

Amy Lieu

Published on August 15, 2022 | 6 min read

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close up of a hand holding a credit card by a computer

When you apply for a new credit card, loan, or another type of financing, a credit check is almost guaranteed to be a part of the application process. Credit scores help lenders predict risk, and lenders can use them to figure out how likely an applicant is to repay their credit obligations in the future.

The vast majority of lenders (90 percent of the top lenders in the U.S.) use FICO® Scores to guide credit-granting decisions. Yet, even if you understand that your FICO® credit score is important in these situations, you may still have questions.

Which details from your credit report influence your FICO® Score, and by how much? More importantly, what information matters to lenders? Discovering the answers to these questions could make a meaningful difference in your financial life—when you apply for new credit and beyond.

What goes into a FICO® Score: The big 5

Your credit score is based on information that appears on your credit report from one of the major credit bureaus—Equifax, TransUnion or Experian. Yet, just because a piece of data is on your credit report doesn’t mean it will help or hurt your FICO® Scores. Some information you might see in your overall credit file does not impact your credit score.

The details that influence your FICO® Scores break down into five distinct categories. Tommy Lee, senior director of Scores and Analytics at FICO, explains why a FICO Score model utilizes these five factors for risk evaluation.

“Over the 30 years since the FICO® Score was introduced, we’ve learned what [information] is the most impactful and predictive to use that doesn’t introduce bias,” says Lee.

Payment history

The largest portion of a FICO® Score comes from the payment history details on your credit report. Payment history makes up 35 percent of a FICO® Score calculation, and it considers credit report factors such as:

Whether you pay credit obligations on time.
Your record of on-time and missed payments.
How many late payments (or delinquencies) appear on your credit report.
The date of your most recent delinquency.
The percentage of accounts you’ve always “paid as agreed.”

FICO designed its scores to be intuitive. “Whether you’ve paid your bills in the past is a very important predictor of whether you’ll pay your bills on time in the future,” Lee says.

Amounts owed

Information about the amount you owe makes up 30 percent of a FICO® Score calculation. This scoring category considers your outstanding debt levels on items like credit cards, auto loans, mortgages and more.

A key factor that impacts your FICO® Scores in this category is your credit utilization ratio, particularly on credit cards. A FICO scoring model will consider how your credit card balances compare to your credit limits. If you’re close to maxing out your credit cards, Lee says that’s a sign of risk.

Some are surprised that this category can be nearly as influential on FICO® Scores as payment history. Yet, FICO research shows that people who use a higher percentage of their credit limits are more likely to struggle with payments on some credit obligations (either now or in the future). When you consider this fact, it’s easy to grasp why “amounts owed” is such an important risk assessment category.

Length of credit history

Length of credit history makes up another 15 percent of a FICO® Score calculation. Some factors a FICO scoring model may consider here include:

How long your oldest account has been open.
The average age of accounts on your credit report.

In each scenario above, having older accounts can work in your favor. The reason why this is true, once again, comes down to risk—or, more specifically, the likelihood that you’ll pay credit obligations late in the future.

“If you’ve demonstrated that you’ve made payments over a longer period of time, the better risk you should be,” says Lee.

New credit

New credit accounts for 10 percent of a FICO® Score calculation. In this category, details like whether you’ve applied for new credit obligations recently and whether you’ve opened new accounts are important.

Having too many hard credit inquiries could potentially hurt you here, and the same is true if you open too many accounts in a short period of time. But, at just 10 percent of a FICO® Score, the impact of these actions is likely to be small compared to other scoring factors.

“Intuitively, if a consumer doesn’t need to be looking for and obtaining new sources of credit, that tends to make them a better credit risk,” says Lee.

Credit mix

Credit mix makes up the final 10 percent of a FICO® Score calculation. This category considers whether you have different types of open and active accounts, including:

Revolving accounts (for example, credit cards and lines of credit)
Installment loans (for example, auto loans, mortgages and student loans)

“If you have been able to make payments on a mix of credit obligations, that would make you a better risk,” Lee notes.

Alternative measures of credit risk

The Consumer Financial Protection Bureau (CFPB) estimates that 26 million Americans are credit invisible with no credit history at any of the major credit bureaus. In recent years, there’s been a trend toward using alternative credit data (like rent payment reporting) as a potential way to help these consumers.

Yet, it’s critical to make sure that new alternative credit score data sources are as predictive, accurate and compliant as traditional data sources. Otherwise, lenders won’t be able to use new credit scores that consider alternative data, and they won’t make any difference in the average consumer’s situation. Unreliable data helps no one.

“Over the years, FICO has defined a very concrete set of criteria to evaluate the promise of new data sources,” says Lee. “We have a six-point test to make sure any credit score we develop that looks at alternative data meets these requirements.”

Thanks to the criteria FICO uses to vet alternative data sources, the company has expanded its analytics capability while still ensuring the soundness of its scoring models.

FICO developed two scoring models—FICO® Score XD (developed in partnership with LexisNexis® Risk Solutions and Equifax®) and the UltraFICO™ Score—that can augment traditional credit bureau information with data from consumer checking accounts, telecommunication accounts, utilities and more. Altogether, the FICO Suite can now score more than 232 million U.S. consumers, or 90 percent of the credit-eligible population of the country.

Why the 5 main scoring factors are still the most important

Alternative credit data has the potential to help some consumers build credit. Yet, the five primary scoring categories still matter most where your FICO® Scores are concerned. These original scoring factors are the most likely to impact you when you apply for new credit.

There’s a reason the five main scoring categories feature the most relevant data points in your FICO® Scores. These factors do an excellent job of predicting risk. In other words, the system works.

“There’s a very strong correlation between these five categories and what credit scores are ultimately designed to predict—which is your ability to make your payments on time,” Lee says.

These primary scoring factors have also stood the test of time. For over 30 years, FICO® scoring models have used these details to successfully help lenders predict future repayment behavior.

If your goal is to earn and keep a good FICO® Score, you should become familiar with FICO’s five credit scoring categories. Then you can work toward maintaining or improving your credit with those details in mind (for example, pay on time, keep your credit utilization low and don’t apply for new credit in excess).

The bottom line

FICO® Scores play a key role in the lending landscape and in other aspects of your financial life. That’s why millions of consumers check their FICO® Scores every month to stay on top of their credit health. And with so many consumers accessing their FICO® Scores, it’s important for those numbers to be intuitive and user-friendly—and, of course, based on stable and accurate data.

FICO® Scores are dynamic. You can influence them for the positive or negative with your credit behavior.

“Because so many consumers have this visibility into FICO® Scores, why their score is changing needs to make sense,” says Lee.

The fact that FICO has stayed consistent with the five main credit scoring factors makes it easier for consumers to learn how to maintain good credit. This consistency helps them understand what lenders are looking at in terms of credit risk, too—and that helps make access to affordable financing more attainable across the board.