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FICO Credit Score Myths

I think the biggest myth that the general population has about credit scores is that it’s based on a set formula. That once you understand that formula, you will be able to manage your score, and possibly calculate your score yourself. For example: If I am late with a payment two times, then my credit score will drop by 20 points. Or, if I pay all of my bills on time for a year, then my credit score will go up 100 points. Obviously, I don’t believe this to be true and that’s why I called the belief a myth.

The exact formula for calculating your credit score has not been released by the Fair Isaac Corporation, the creator of the scoring formula known as FICO. What they have released is a list of criteria that are used in determining your score. These are:

  • Payment history - 35%

  • Amount of debt - 30%

  • Length of credit history - 15%

  • Types of credit used - 10%

  • Recent search for credit and amount of credit obtained recently - 10%

So, based on the above, if I get the perfect mix for types of credit used, I will get the 85 points (10% of 850) for this criteria. The only problem is that the perfect mix for type of credit used has never been disclosed. In addition, 35% is attributed to payment history. But if a person is substantially late, on multiple accounts, their credit score will drop by more than 35%. In addition, there are factors that can substantially affect your credit score but are not in any of the above criteria. Some of these are:

  • Employment history

  • Court judgments

  • Bankruptcy

  • And use of finance companies

The result is we have some guidelines we can follow to manage our credit score but the fact is that we cannot predict the change in our credit score based on any particular action. We are left with, use credit responsibly, pay your bills on time and your credit score should be okay.

Remember, if you’re not working the system, it’s working you.

PapaJoe

About the Author

Visit PapaJoe’s blog for helpful tips on understanding your credit score.

Copyright 2006, AboutUnderstandingMyCreditScore.com

    • This entry was posted on Thursday, November 30th, 2006 at 10:39 pm and is filed under Credit Score Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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