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What is a credit (FICO) score and how is it calculated?

Your "credit score" is calculated by a proprietary formula developed by Fair, Isaac and Company, and is, essentially, your "Financial SAT Score," as it ranges from 300 to 850. It is based on the content of your credit histories as set forth by Equifax, Experian, and Transunion. 

Since the reports generated by each of these companies are not identical, neither is the FICO score based on them, so it can vary a bit.  You should always know all three scores and check them regularly.

What Goes Into the Score?

Although the formula itself is proprietary (and thus a closely guarded trade secret), we do know what information from your credit history is used in the calculation and how it is weighed.  It is as follows:

  • Payment History: 35%
  • Amounts Owed: 30%
  • Length of Credit History: 15%
  • Types of Credit Used: 10%
  • New Credit: 10%

As you can see, someone with a large amount of debt and a spotty payment history (chronically missed or late payments) can end up with a much lower score than someone with debt that is manageable.  Thus keeping control of your debt is very important to maintaining a high score.

It Isn't Just the Score!

However, it is very important to bear in mind that your FICO score is not the only thing that can affect whether or not you get credit.  As pointed out on the site MyFico.com, "lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting." As also noted on that site,

"For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO score. Thus, it's impossible to say exactly how important any single factor is in determining your score - even the levels of importance shown here are for the general population, and will be different for different credit profiles. What's important is the mix of information, which varies from person to person, and for any one person over time."

Credit scores are therefore somewhat unique, but knowing what goes into them can go a long way to knowing how to improve them (or keep them from going down).

You are entitled to a copy of your credit report from each agency once a year (or if you are turned down for credit). Be sure you also get your scores, so that you will know the whole picture.

So What Should I Do?

If your credit score is being weighed down by debt (especially if it is below 600), then ironically bankruptcy might be the best course for you.  Get rid of that old debt, work to rebuild your score afterwards, and you might be better off!

If you need help deciding whether bankruptcy is right for you, then download my free book, Am I In Too Deep? A Guide to Knowing When You Need to File Bankruptcy in New Jersey.  You could also just give me a call at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your situation.

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