Your credit score is an important number that determines your rate of interest on loans and credit cards. Do you ever wonder how your credit score is calculated? If you are like most people, your credit score is important to you, but it may also be a bit of a mystery.
Many of my clients have asked how their credit score is calculated. Let’s start with a little credit score 101. The most common score used is the FICO score. The score, the 3-digit number, is calculated using several different inputs. The largest portion of the score is based on your payment history (35%); followed by your overall debt level, or amount you owe (30%); the actual length of your credit history (15%); the number of inquiries, also known as new credit, (10%); and closed out by your mix of credit (10%). A detailed explanation of a FICO score breakdown can be found here: http://www.myfico.com/crediteducation/whatsinyourscore.aspx.
Based on this information alone, the most important thing you can do to improve your credit score is to pay your bills in advance! What is the reasoning here? Well, 35% of your FICO score is based on your payment history. Paying in advance ensures that your bills will be paid on time, because most companies do not post payments received on the day they receive them. Paying off your bills in advance of the due date ensures that your payment is posted in time and keeps your credit score healthy in the “Payment History” category of your FICO score. Just keep this in mind- 35% of your score is simply paying on time! So post your payment in advance of the due date and you will help your credit score.
What happens when your financial situation becomes overwhelming to the point of NOT being able to pay your bills on time? To find out, read Part Two of our Credit and Bankruptcy Blog series. And be sure to check out our website http://www.KDBLawFirm.net for more information.
Be safe and take care! ~Kirk Berkhimer, Norfolk Bankruptcy Attorney.
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