The "skinny" on Credit Scores

I was very surprised at the number of people completely oblivious to their financial standing. During my 6 years in banking, I learned that people were more concerned with their monthly payment than the interest they were paying. It was not until they were shown the amount of money wasted because of their interest rates due to their credit scores that light bulbs went off. How to fix their current standing soon became their top priority.

After being shown their afflictions, and given information on how to resolve their credit issues, most people are receptive and jump at the chance to walk in the path of the credit savvy. Credit Scores are simple to understand and follow when broken down into the subgroups that comprise the Fair IIsaac Corporation (FICO) score. I'm a believer when it comes to the financial knowledge of guru Suze Orman; however, an article by Lee Ann Obringer at Money.Howstuffworks.com gives a great breakdown of the components of a FICO score. The FICO can range from 300-850 approximately. The actual formula to determine a score is owed by Fair Issac. The following in the breakdown of a credit score:

-35 % is based on payment history.
-30% is based on outstanding debt.
-15% is based on the amount of time you've had the credit line.
-10% is based on new credit lines opened; new credit negatively affects scores for a short time.
It also takes into account hard and soft inquiries, or companies looking at your credit score
as well as you personally looking at your score. When done within close proximity of
each other, hard inquiries count as one. Soft inquires, or you checking your score does
not affect your FICO.
-10% is based on the types of credit lines that you have, revolving (credit cards),
and installment loans (fix monthly payments). (http://www.money.howstuffworks.com/, How Credit Scores Work by Lee Ann Obringer, Feb 8, 2010)

When your parents told you to never pay any of your bills late, you should have listened to them, as 35% of the FICO score is determined by this factor. Stop focusing on payments, and start having discussions and thoughts on the real cost of items that you're purchasing or want to purchase. A good FICO score can be the difference between affording college tuition for your children, or passing debt onto them via student loans.

If your interested in learning more about all aspects of credit and how to make informed decisions regarding your finances, "The Young, Fabulous, and Broke" by Suze Orman is an excellent reference guide to assist you in that effort. Until next time good people, Hotep!