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Credit Scores - only important when you can't pay cash!!!

What is a FICO Credit Score, how important is it, and how is it used?

First of all, FICO stands for the name of the two indiviuals that figured out the Credit Score Formula (Fair & Isaac) with CO being short for company. The formula that they developed is designed to predict the odds that someone will payback whatever they owe and is based on spending and credit habits.

The FICO formula changes from time-to-time so, please click Here for more information on the FICO formula.

The formula does not care how thrifty you are or how well you save money, which is why paying cash for everything will not get you a good score and there are somethings, e.g., Rental Cars, that require you to have a Credit Card. It cares about how well you've handled credit in the past.

The purpose of your credit score is to protect creditors against making a bad loan. They want to make sure that you have the resources to make the payments, along with a pattern of having already done so. The potential lender wants to know how disciplined of a buyer you are so a bunch of maxed our credit cards doesn't look good.

Payment History

35% of your credit score is based on your "Payment History." This includes on-time payments, the amounts owed, and length of any delinquencies as well as adverse public records such as bankruptcies, judgments, or liens.

Debts and Credit Utilization

30% of your credit score is based on what constitutes your debts and includes factors like how many accounts you owe money on, the type and amount of debt, and the ratio of money owed to credit available, often referred to as a credit utilization rate.

The Credit Utilization rate is the percentage of all of your "available-credit" that has been converted to debt. For example, if someone has multiple credit cards with a combined total credit line of $28,000 and is carrying a balance of (owes) $7,000, then the utilization rate is 25%.

It needs to be noted that the credit utilization rate is not the same thing as the Debt To Income ration. DTI is not used in determining a FICO credit score.

Credit History

15% of your credit score is based on your Credit History which is the length of time your accounts have been open and how long it has been since they have been active.

Types of Credit

10% of your credit score is based on the types of credit used such that the wider the variety of the types of accounts (e.g., credit cards, mortgages, retail accounts), the better and more beneficial than holding just a few accounts.

New Account Activity

10% of your credit score is based on the number of new applications you've put in, the number of recent credit inquiries, and how many new accounts you have opened. High "new" account activity in too short of a time period looks risky and will affect your score.

DTI (Debt to Income Ratio)

Your DTI is determined from how much you're making in debt payments versus how much money you make and since the FICO Credit Score is only designed to tell the lenders how likely someone is to pay off or default on a loan and a large salary does not matter in a FICO Credit Score calculation.

Click Here and scroll down several pages for a better explanation of Debt to Income ratios.

How do I fix this mess?

Debt can be crushing and finding oneself in a place where your DTI's and your Credit Utilization Ratios are too high can be overwhelming, but this is the reason that we exist. We're not here to fix your credit, but to help you to permanently fix it, yourself, using our proven Debt Mitigation program.

Click Here to see our products.

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