Fair Isaac Corporation developed FICO® Score models to rate a consumer’s credit history. Since 1989, the company has developed many different scoring models to sell to lenders and consumers.

A pie chart is often used to explain factors that impact a FICO Score. There are 5 pie pieces: payment history, amounts owed, length of credit history, new credit, and credit mix. Each piece is allocated a percent of the pie.

The 2 largest pie pieces are payment history and amounts owed. Payment history is a consumer’s record of paying accounts as agreed. Amounts owed (aka credit utilization ratio) compares total amount of available credit and amount being used. Example: Pete has 2 credit cards with $5,000 limits on each ($10,000 total available). Each billing cycle he charges $5,000. Pete’s credit utilization is 50% and higher than the recommended 30% or less.

The other 3 pie pieces – length of credit history, new credit, and credit mix are smaller pieces. A long history of paying as agreed can boost a score. If that history includes a mix of installment and revolving accounts that provides another boost. Applying for too many lines of new credit in a short time-frame can have a negative impact.

The 5-piece pie obscures the fact that 2 pie pieces are essential for a high credit score – history of paying as agreed and a relatively low credit utilization ratio. If these 2 factors are present a consumer will have a higher score and pay less to borrow money. So when thinking about a credit score, evaluate these 2 factors first and foremost.

A consumer can access free credit reports at www.annualcreditreport.com The free reports do not include a score. They do provide payment history and credit utilization.

1