Your credit score is often called your “FICO” score. FICO is actually a private company, so it doesn’t share its formula (or algorithm). It tries to keep most of it secret so it can sell its scores to credit agencies and others. Nevertheless, it does let some general information out, which is what I’m going to share with you here.
First, about one-third (1/3) of your score is based on your credit history. Primarily, this means how many, if any, late payments show up. Even one payment being 30 days late will show up in the formula for 7 years from the date of that late payment (though that alone wouldn’t have a very strong effect).
Another one-third (1/3) of your score is based on what’s called your “credit utilization” rate. This means how much of the credit that’s available to you is being used. For example, if you have credit cards with a total of $30,000 available credit on them, it’s recommended that you keep your balances less than $10,000 or so. This means you’re only using about one-third of the credit you have available to you.
This “credit utilization” factor is very important, and not understood by many people. There’s nothing wrong with having credit cards (in many ways they are more secure than debit cards) if you’re careful with them. Some even offer generous “rewards” programs. The key is to keep current with your payments and keep the balance less than right up to the total that’s available to you. Only using one-third of what’s available is ideal. Another surprising fact to many people is that it doesn’t often matter how much money we’re talking about: if you have one credit card with $3,000 available credit on it, but never have a balance above $1,000, that’s still only a one-third “utilization” rate.
If you’ve recently gotten a car loan, your credit may dip temporarily because you are “utilizing” the full amount of the car loan. Once you’ve paid the car half-way down, the original amount of the loan is still counted and shows you are only utilizing one-half of that original credit amount.
Other factors, making up roughly 10% of your score each include: How many credit inquiries you’ve had recently, the length of your credit history, and the mix of credit you have (for example, having a good history with a mortgage, car loan, and credit cards is a good mix).
Notice that the first two factors make up the biggest single portions of your credit score. This is why filing for Chapter 7 bankruptcy, instead of hurting your credit score (if it’s already suffering), actually improves it – you’ve immediately erased the late payments category, and re-set the credit utilization percentage.
To find out more about whether bankruptcy can help you, please feel free to view other articles on my website, or set up a free office consultation or phone call with me, Peter Blinn, for anywhere in and around the Marion, Sumter, Citrus, and Lake county areas.