You know you have one, but what exactly is it? Your FICO score is supposed to be a wonderful reflection of your creditworthiness and your keys to the kingdom of credit extension. But do you really need to know your FICO score and how important is it?
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The Fair Isaac Corporation or FICO, Score is based on several factors. The number is used by lenders to determine your creditworthiness. It's the “keys to the kingdom” when it comes to borrowing money. Not only can it determine if you get a credit extension, it will also factor into what interest rate you will be eligible for. And beyond getting a loan, there are some employers that look at credit scores as well.
Here's a breakdown of how your credit score is calculated:
As you can see, you're looking at 5 different factors that influence your overall FICO score. Let's look at each factor a bit more closely.
Payment History – How you have handled paying your past debts makes up 35% of your score. This will include things such as:
- Judgments & Suits
- Wage Attachments
- Accounts with and without late payments
Types of Credit Used – While only 10% of your score, what is assessed here is a “healthy mix” of the types of credit you have. What is in the mix?
- Credit cards
- Installment loans
- Retail accounts
- Mortgage accounts
- Finance company accounts.
I take issue with this portion of the score, even though it's a small percentage. You financially “healthier” if you have a credit card, a mortgage and a car loan or are you in better shape with no credit card debt and a car that's paid off. I guess it depends on who you're relying on for a healthy perspective of finance: God or “They”.
New Credit – According to myfico.com, your score is not negatively impacted by “searching for credit”. The number of recent credit accounts is also factored into this category which is 10% of your total score.
Length of Credit History –15% of your score is determined based on how long you have had established credit. In general, having longer credit history is a positive factor. This will look at the length of your overall credit history, the length of certain accounts and how long it has been since you have utilized certain accounts.
It's important to know that paying off cards and closing out cards are two different things. When you close a card you lose that history. Closing too many accounts in a short period of time can have a negative impact on your credit even if you're working your way out of debt.
Again, whose opinion matters more – God's or “Theirs”? But more on that in a bit, let's continue to the last piece of the pie.
Amounts Owed – Last but certainly not least, 30% of your score is based on the balance of your credit accounts. Several things factor into the balances including:
- Total amount due on all accounts
- Total amount due by type of account
- Number of accounts you have
- Percentage of available credit used (this is called credit utilization)
- Percentage of amount remaining versus amount originally
Did you notice anything above? Having a “good” credit score means you actually have to incur debt. You have to be in debt. Simply stated (and all else being equal), your score could be higher if you have some debt and pay every payment on time versus someone who has no mortgage or consumer debt.
Does that seem backward? Crazy? Unbiblical?
Yes, yes….and yes.
A Biblical Perspective on Money
It can be hard to navigate through this world when trying to live by the biblical principle of not owing money to any man.
In the perfect scenario, we would pay cash for everything, including a house. This would mean planning ahead accordingly in our younger years and living on a budget that focuses heavily on savings and giving and less on spending. It would also mean resisting the urge (and peer pressure) to buy a home right after college or marriage.
Most of us either did not pay cash for our homes or are not in a position to buy a home with cash and need a home out of necessity.
Borrowing money is a reality. Using our creditworthiness is a reality.
The difference is a wise steward uses credit as a tool, not a crutch.
Should I Even Look At My Credit Score?
There are times you might need to use credit and there's no shame in that.
There are times when it is wise to use a credit card instead of paying cash (points, cash back, etc). But your credit score does not define you.
The truth is, we must honor God with our finances before we worry about credit scores.
You must be a student of your finances. You must study your budget, your spending, and your credit score. Keeping a close eye on these elements will help you thrive in your family finances.
I recommend using Credit Karma to check your credit score. It is truly free (no credit card required) and you can monitor two of the three credit reporting agencies, plus see a complete list of accounts hitting your credit.
Monitoring your credit score is more than looking for a loan – you need to be aware of activity happening under your social security number so watching your reports and FICO score can help you identify odd behaviors.