The Most Important Part Of Your Credit Score

Of all the information that goes into your credit score, this affects it the most.

Aug 24, 2014 at 11:25AM

Most lenders use the FICO credit scoring model when making lending decisions. Unfortunately, the exact formula the Fair Isaac Company (NYSE: FICO) uses to produce the scores is a closely guarded secret. Not only that, but the formula is constantly being updated and tweaked, and some lenders use older scoring formulas and some use the latest formulas available.

However, there are some parts of the methodology that are available to the public. Specifically, the percentage of your score that comes from each broad category is available on

Credit Cards Pd

The single biggest factor in calculating your credit score is your payment history, which determines 35% of your FICO score. However, there is more involved in this category that you may think. Here are a few tips to help you optimize the biggest part of your credit score.

The basics of payment history
Obviously, the important thing lenders look for here is that you've paid your bills on time. How you perform with your existing credit accounts is a very good indicator of how you'll do with new ones.

And, just because you have a couple of late payments on your record doesn't mean your score can't be good. An otherwise good history can make up for one or two late-payment dings.

The payment history formula takes all of your credit accounts into consideration, including credit cards, retail credit accounts, installment loans, and mortgages. Negative items will generally stay on your report for seven years, and things like bankruptcy, judgments, foreclosures, liens, charge-offs and collection accounts have the most serious negative effects.

Time is a big factor
One of the most important factors when the FICO score determines the effect of negative information is how long ago it occurred.


In other words, if you have a charged-off account on your credit, it will likely remain there for seven years from when the account first became delinquent. However, over time it'll have less of an effect on your credit score. The same thing applies to late payments. If you missed a credit card payment four years ago, it will have less of an effect on your score than if you missed a payment just a few months ago.

Many people don't realize this and consider their credit "ruined" for seven years once negative information appears. However, as long as you keep paying the rest of your accounts on time, you should still see your score increase gradually, even with the bad information still on your report.

Other factors
There are several other factors that make up your payment history. For example, when factoring in late payments, the formula takes into account how late you were. A 30-day late payment will hurt your credit a lot less than if you were 90 days late.

With collection accounts, the amounts you owe are taken into consideration. If you owe current balances of $10,000 on accounts in good standing but have a $200 collection, it'll hurt your score less than if those numbers were reversed.

And with recently announced rule changes, paid collections will no longer count toward credit scores, whether the account has been paid in full or settled for less than the outstanding amount. Medical collections will also begin to count less when determining scores.

So, if you have outstanding collections accounts, it may be a good idea to try and settle the debts, even if they are several years old. Many collections agencies will settle older accounts for a fraction of the original balance, and the positive effect this could have on your score could make it well worth the cost.

The best plan of attack
Aside from paying off old collections, the absolute best thing you can do is to establish an excellent payment history from this point forward. If you have some negative information on your report and don't have any open credit card accounts, get one. There are secured credit cards like this example from Capital One that are easy to obtain and can go a long way toward building an excellent credit history.

As mentioned, your recent history counts more than older information, so the present is the most important time in determining your future credit score. Make sure you're taking advantage of this fact.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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