Your credit score, which is also referred to as your FICO score, is a measure that creditors use to assess your potential credit worthiness. Generally speaking, the higher your credit score, the less of a credit risk borrowers will perceive you to be. If you have a low FICO score, then you could be deemed a higher credit risk. Having a high credit score will help you secure a loan for big-ticket items such as a car or home, and will also help you get more favorable terms than if you had a lower credit score.
How the FICO is Weighted
The Fair Isaac Corporation, the creator of the FICO score, does not reveal the exact way in which they arrive at each individual FICO score. The company does, however, detail the different weights they assign to different aspects of a person’s financial situation. Your payment history makes up 35 percent of your FICO score, while your total debt owed amounts to 30 percent of your final FICO score. Making up the final 15, ten and ten percent of your FICO score are the length of your credit history, any new credit that you have taken on, and the type of credit you have used.12
How the Number of Credit Cards You Have Influences Your Score
When calculating your individual FICO score, the number of credit cards that you have will influence the smallest weighted category: the type of credit that you use. Although this is given the least weight in the FICO score calculation, this is not to say that the number of credit cards you have will not be important. The more credit card accounts you have, the more credit you will have available to you.2
If you were to run up your debt, this could leave you unable to pay for any new loans you agree to. Therefore, if you have fewer credit card accounts, you will have less credit available to you, which will increase your credit score. However, responsibly managing a small number of credit cards can allow you to possess a better credit score compared to someone with no credit cards, because the lack of a consistent payment history is considered to be riskier.
There is a catch in this process, however. People who tend to carry a balance on their credit cards instead of paying them off every month will have a higher credit rating than those who wisely avoid interest payments. The reason for this is that credit card companies want to make money, and they only make money off of individuals who pay interest. This means that people who can’t afford to pay off their accounts in full may end up getting more deeply in debt because their high credit scores allow them to access even higher credit limits and more types of credit.
Article written by Matt Lee and published by Investopedia