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Debt Relief Information |
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What Is A FICO Score?
Your FICO score or credit score as it's commonly called is a very important calculation that can control whether or not you are eligible to receive credit and if eligible the terms you can receive credit under. Failure to understand the impact this score can have on you future purchasing power and lifestyle can be disastrous. This article will break down all the information you need to know regarding your FICO score. As I mentioned above the FICO score is a numerical score that is based on your financial history as collected in your credit report. Creditors can use this number to evaluate whether or not you are able to pay a loan back on time. The higher the score the more likely you are to pay off a loan on time and the less of a credit risk you pose. The FICO or credit score ranges are broken down as follows: 720-850 - This represent the best score range 700-719 - Able to obtain favorable financing terms 675-699- This is still a decent score range 620-674 - May have trouble obtaining favorable credit terms 560-619 - May have trouble obtaining credit 500-559 - Time to improve your score Your credit score is broken down into 5 distinct categories each with their own importance based on a percentile. The 5 categories and the percentage they represent I relation to your credit score are as follows: Payment History - 35% Amounts Owed - 30% Length of Credit History - 15% New Credit - 10% Types of Credit Used - 10% Your payment history contains information on credit cards, retail accounts, installment loans, finance company accounts and any mortgages you may have had. It also details any past due accounts and the amount owed on hem. You will also find bankruptcy information as well as other adverse information in regards to your credit history. This is why it warrants a 35% piece of the pie. Your amount owed is generally speaking the amount owed on any accounts you currently have and number of accounts with balances. Note that it has a large impact (30%) on your credit score. The length of your credit history details when accounts were opened and the last activity on those accounts. New credit shows the number of recently opened accounts by the type of account and number of account inquiries. Finally the type of credit used is a snapshot of what types of financing you have held. Other information that is included in your credit report but has no bearing on your FICO score includes your race, age, where you live and your sex and employment information. Although the FICO score doesn't use these factors the employment information may be used by other companies and creditors to help in their decision making process. There are three major credit-reporting agencies - Equifax, Experian and TransUnion that have your credit information on hand. Each of these credit bureaus maintains their information separately, which can cause the financial data to be slightly different among the three of them. Most experts agree that in order to get the best snapshot of your financial history and credit worthiness it is a good idea to request a report from each of the reporting agencies. It is also highly recommended that you actually review your credit report once a year in order to identify and correct any errors before they cause any future potential problems when you apply for credit. Recent changes in the laws no allow for consumers to request 1 free credit report each year in order to look for any such errors. Here is the contact information for each of the three reporting credit bureaus: Equifax: (800) 685-1111, www.equifax.com As you can see your FICO Score is a very important number that represents your financial trustworthiness in the eyes of creditors. Failure to properly monitor it could cause you future headaches when it comes time to apply for any form of credit. Timothy Gorman is a successful Webmaster and publisher of Debt-Relief-Solutions.com. He provides more debt relief, consolidation and credit repair information that you can research in your pajamas on his website.
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Reducing Debt Before It's Too Late ... How to avoid the pitfalls of creeping debt. 11/20/08
by: Debs Seeber
Reducing debt usually isn't a high priority for people until they have already gotten into trouble with overspending. Using a few basic guidelines, and debt calculations, can help you see when your debt load is getting into the danger zone.
Budgeting Guidelines
Creditors use budgeting guidelines when reviewing and approving credit. If your debt exceeds the financial communities recommended guidelines, then you have a higher risk of credit applications being denied.
Getting, and keeping, your debt in line with recommended budgeting guidelines, is an important step in debt reduction.
Use the following recommended budgeting guidelines (the same ones used by Financial Institutions) to review the items in your budget:
Debt Income Ratios
The second step is calculating your debt income ratio. Once you know what your ratio is, you will understand just how important debt load is to your overall financial picture. Your debt income ratio is the percent of your monthly take-home pay that goes to paying debts.
You calculate it by taking the amount needed to repay debts each month, including rent or mortgage, and divide by your take-home pay (your net pay after taxes). Remember, this is "Debt" ratio, so only include actual debt repayment in the calculation.
Credit To Debt Ratio
Just because you pay off a credit card is no reason to close your account. One little known fact about the Credit to Debt Ratio is the reverse effect it has on your credit score. If you pay off a credit card, and close the account, you are actually negatively impacting your credit score.
The reason for this negative effect is in the calculation of the Credit to Debt Ratio itself. This ratio is the relationship of your debt total vs. your credit limit.
You calculate it by dividing the total credit limit of all credit cards and loan accounts by the total of the actual debt (spent total). Now, if you pay off a credit card, you are reducing the actual debt, which is great, but, if you close the account, you are also dramatically reducing the credit limit you have, and usually by a higher percentage than the debt reduction.
Pay Yourself First
Essential to long-term financial success, and protecting your future, is paying yourself first. While this may seem easy to do, it happens to be the last thing most people do, instead of first. Debts and other financial obligations, money for entertainment, and other spending always seem to take a higher priority. All I can say is, STOP! Think about it, if you aren't worth being paid first, then who is? Always put something away in your savings, and leave it alone. It doesn't matter if it's only $5 a week, just do it!
Snowball The Credit Cards
Last, but not least, is making extra payments, not just the minimum payments, on your credit cards. You have probably already seen this many times, but it just can't be stressed enough. Paying just $10 extra a month on a credit card, above the minimum required payment, can cut your repayment term in half, if not more! So, squeeze out that extra payment, however small, every month, and take advantage of the compounding effect of snowballing your debt away.
The Power of Financial Knowledge
Remember, you don't have to be a financial whiz to understand what's going on with your credit and debt. Just a few simple calculations, and an eye on the future, will go a long way to help you succeed financially and keep your debt under control. Be safe, be smart, do the math!
Related articles:
Compare the pros and cons of debt consolidation loans, service companies, and credit counseling.
Understanding how your credit score can affect your debt relief choice
Copyright 2004 DebtSteps.com, all rights reserved. Reprinted with permission.
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About The Author
Debs is the editor of www.DebtSteps.com where you can get the answers you need about debt relief, consolidation, credit counseling and more. Free subscrption and money management worksheets http://www.debtsteps.com/debt-help.html
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