5 Factors Lenders Use to Best Measure Your Credit Risk


When applying for a new credit card, loan, or other type of financing, a credit check is almost guaranteed to be part of the application process. Credit scores help lenders predict risk, and lenders can use them to determine an applicant’s likelihood of repaying credit obligations in the future.

The vast majority of lenders (90% of top lenders in the United States) use FICO® scores to guide lending decisions. Yet, even if you understand that your FICO® credit score is important in these situations, you may still have questions.

What details from your credit report influence your FICO® score, and by how much? More importantly, what information is important to lenders? Finding the answers to these questions could make a significant difference in your financial life, when applying 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 something is on your credit report doesn’t mean it will help or hurt your FICO® scores. Some information that you may see in your overall credit report does not impact your credit score.

The details that influence your FICO® scores fall into five distinct categories. Tommy Lee, Senior Director of Scoring and Analytics at FICO, explains why a FICO scoring model uses these five factors for risk assessment.

“In the 30 years since the introduction of the FICO® score, we have learned what [information] is the most impactful and predictive to use that does not introduce bias,” says Lee.

Payment history

The largest part of a FICO® score comes from the payment history details on your credit report. Payment history makes up 35% of the calculation of a FICO® score and takes into account credit report factors such as:

  • That you pay your credit obligations on time.
  • Your record of on-time and missed payments.
  • How many late payments (or defaults) appear on your credit report.
  • The date of your last payment default.
  • The percentage of accounts that you have always “paid as agreed”.

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

Amounts due

Information about how much you owe is 30% of the FICO® score calculation. This rating category considers your current debt levels on things like credit cards, car loans, mortgages and more.

A key factor that affects your FICO® scores in this category is your rate of credit utilization, especially on credit cards. A FICO scoring model will look at how your credit card balances compare to your credit limits. If you’re about to max out your credit cards, Lee says that’s a sign of risk.

Some are surprised that this category can have almost as much influence 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 have trouble paying certain credit obligations (currently or in the future). When you consider this fact, it’s easy to see why “Amounts Due” is such an important risk assessment category.

Length of credit history

The length of credit history accounts for an additional 15% of the FICO® score calculation. Some factors that a FICO scoring model can take into account 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 this is true, again, comes down to the risk or, more specifically, the likelihood that you will pay your credit obligations late in the future.

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

New credit

New credit accounts represent 10% of the calculation of a FICO® score. In this category, details such as whether you have recently applied for new credit obligations and opened new accounts are important.

Having too many serious credit inquiries could potentially hurt you here, and the same goes if you open too many accounts in a short time. But, at just 10% 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 research and obtain new sources of credit, that tends to make them a better credit risk,” says Lee.

Composition of credit

The combination of credits constitutes the final 10% 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, car loans, mortgages and student loans)

“If you were 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 have dark credit with no credit history at one of the major credit bureaus. In recent years, there has been a trend to use alternative credit data (such as rent payment reports) as a potential way to help these consumers.

Yet, it is essential to ensure that new alternative credit score data sources are as predictive, accurate and compliant as traditional data sources. Otherwise, lenders will not be able to use new credit scores that take into account alternative data, and it will make no difference to the situation of the average consumer. Unreliable data does not help anyone.

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

Using the criteria that FICO uses to check alternative data sources, the company has expanded its analytical capacity while ensuring the validity of its scoring models.

FICO has developed two scoring models – FICO® Score XD (developed in partnership with LexisNexis® Risk Solutions and Equifax®) and UltraFICO™ Score – which can supplement traditional credit bureau information with data from consumer checking accounts, telecom accounts, utilities and more. In total, the FICO suite can now reach more than 232 million US consumers, or 90% of the nation’s credit-eligible population.

Why the Top 5 Rating Factors Are Still the Most Important

Alternative credit data has the potential to help some consumers build credit. Yet the top five scoring categories still matter the most when it comes to your FICO® scores. These original scoring factors are the most likely to impact you when applying for new credit.

There’s a reason the top five scoring categories present 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 key rating factors have also stood the test of time. For more than 30 years, FICO® scoring models have used these details to successfully help lenders predict future repayment behavior.

If your goal is to achieve and maintain a good FICO® score, you should familiarize yourself with the five FICO score categories. Then you can work on maintaining or improving your credit by keeping these details in mind (for example, pay on time, keep your credit usage low, and don’t ask for excess new credit) .

The bottom line

FICO® scores play a key role in the lending landscape and 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 that these numbers are intuitive and user-friendly and, of course, based on stable and accurate data.

FICO® scores are dynamic. You can influence them positively or negatively with your credit behavior.

“Because so many consumers have this visibility into FICO® scores, why their score changes must make sense,” says Lee.

The fact that FICO has remained consistent with the five major credit scoring factors makes it easier for consumers to learn how to maintain good credit. This consistency also helps them understand what lenders are looking at in terms of credit risk, which helps make access to affordable finance more accessible to everyone.

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