One measure of Americans’ financial health has remained surprisingly steady during the economic downturn: the consumer credit score. As explained in Components of your FICO credit score, this score is used by banks and lenders to determine how much credit to extend to borrowers, and under what terms.

That is beginning to change, for a variety of reasons that have nothing to do with how you handle your personal finances or whether or not you’ve been responsible in maintaining your credit payments.

Banks and lenders are closing a record number of credit card accounts and reducing millions of dollars in credit lines. This results in consumer credit scores being reduced because of the diminishing credit lines. The domino effect continues, with individuals with formerly good credit scores being denied credit because of the reduced score, further reducing the score and hampering the ability to obtain credit from other lenders. The cascade effect continues, affecting such things as car insurance, where a consumer’s credit score is used to determine rates; and possibly affecting employment.

This raises a question about flaws in the consumer credit rating system. Consumers are seeing their FICO scores drop through no fault of their own.

Most likely, Fair Isaac will be watching to see how the economic downturn affects credit scores but it isn’t likely any changes will be made in the immediate future. Lenders, and others who utilize the scores to make financial decisions, may have to take a look at other economic indicators and place less emphasis on the FICO score.

CreditCheckFacts will continue to monitor the situation and report back.

There are five key elements that comprise your FICO score: payment history: outstanding debts, credit history age, inquiries, and account types. Each of these items is given a different weight in the algorithm that determines your FICO score. Payment history is 35% of the score, outstanding debt is 30%, credit history age is 15%, and both inquiries and account types are 10% of your total FICO score.

Now you know what components are included in your credit score. What does each of these include? More importantly, what’s considered good and what’s bad for each component?

Payment History

Your payment history includes the details of how you’ve been paying your bills. That is, if you’ve been paying them at all. Each of your credit accounts reports your payments as on time or late. Late payments are reported as being 30-, 60-, 90-, and 120-days late. After six months of non-payment, many creditors charge-off your account, deeming it as an uncollectible account. The more recent the late payments are, the worse the effect it is on your credit score. Timely monthly payments boost your score in this area.

Outstanding Debts

This portion of your FICO score takes into account the total amount you owe on all your credit accounts. This includes credit cards, student loans, auto loans, mortgages, lines of credit, etc. Not only does the FICO score consider the total amount you owe, it also considers the total credit you have available. This ratio is known as your credit utilization. The higher your credit utilization – meaning the closer your balances are to the limit – the lower your credit score. You should keep credit account balances at or below 30% of the limit.

Credit History Age

The length of time that you have had credit is a determining factor of your FICO score. A longer credit history is better than a shorter one. This is because there is more data to create a pattern of good or bad payments.

Inquiries

Each time a business uses your FICO score to make a credit-based decision about you, an inquiry is made to a credit bureau. This inquiry then appears on your credit report. Multiple inquiries within a relatively short period of time have a negative effect on your FICO score, especially if these are credit card inquiries. Few to no inquiries is better. The good news is that only inquiries from the past two years are factored into your FICO score.

Account Types

When you have several different types of credit accounts – loans and revolving credit – it is better than having a single type of credit account.