How Credit Score is Compiled

You have seen dozens of commercials about credit scores and have heard even more rumors about credit and how your score affects you.  So what is a credit score and how is it determined?  Well the first thing you need to know is that no transaction is safe.  Your financial privacy doesn’t really exist.  Agencies are tracking every payment that you make or miss in a huge database that is accessed by credit bureaus.  Although there are three major bureaus, the one that affects you the most is FICO.  The Fair Issac Company developed a formula that gives credit companies and banks an idea of the likelihood you will pay your bills on time.

This formula outputs a three digit number between 300 and 850 that becomes your credit score.  The actual factors that go into determining the score are; payment history, accounts owed, length of credit history, types of credit, new credit.

The weight that is given to each factor according to FICO is; payment history – 35%, accounts owed – 30%, length of credit history- 15%, new credit – 10% and type of credit – 10%.

There are still many holes in the equation like how much does a few infractions affect the score.  Fortunately FICO released even more information about how your credit score is compiled.  With payment history FICO basically says that the longer you have gone without a derogatory record the better.  24 months or more since your last ‘bad’ record and you can earn 55 points.  If you have never had a negative public record you will receive 75 points.

Another category is called ‘Outstanding Debt’ which refers to what credit you have out currently.  It is compiled by figuring out the average balance on revolving trades.  It seems that if you have no revolving trades you get a few points, if you have a zero balance on revolving trades, you get a few more.  If you have too much balance on revolving trades, let’s say 1000 dollars or more, you receive a penalty.  If you have a balance in the middle, around 500 dollars, you get the most credit points.

For credit history length, the score is figured out by number of months in the file.  This one is simple.  The longer your history the more points you get, up to 75.  Pursuit of new credit is also simple.  The more you ask for credit, the fewer points you get.  Zero is the best at 70 points.

Diversity in credit is scored based on how many bankcard trade lines you have.  3 is the magic number here, but if you have 4 or more you only lose 10 points.  Having zero trade lines yields you only 15 points.

This information is most useful for those who are attempting to improve their credit score.  It answers some confusion like how much balance you should carry on your credit card.  It also tells us that inquiring about credit too often can affect your score up to 50 points!

It is important to know these things because a few points can on your credit score can save you a lot of money.  Banks have cutoff numbers that decide how much you pay in interest.  If the cut off for a certain rate is 710 and you are at 709, guess what?  You miss out.  By using the information given here you can optimize your credit score and save a lot of money when you use credit to make purchases.

Credit score is formulated using several factors that FICO has recently released.  Using this information can make your life easier in many aspects and give you financial stability.

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How To Protect Your Credit After a Divorce

Credit and DivorceFor anyone that has been through a divorce, you know all of the heartache that is associated with it. You know all of the tears, the frustrations, the fear, the anger, and the confusion that comes along with a divorce. Divorce is a painful, expensive, life changing experience that no one ever hopes to go through.

But if you are in a situation where you are going through a divorce, you want to do everything you can to limit the damage on your life. As much as possible, you want to limit the bad effects this has on you.

Many of the life-altering effects of divorce cannot be avoided. They are a natural occurrence that comes along with this horrible event. But some of these effects can be avoided.

One of the things that you can avoid is having divorce destroy your credit. Many times, poor credit happens as a result of a divorce. But with some work, this can be prevented.

How divorce can negatively impact your credit

Many people who go through a divorce have their credit negatively impacted because of the divorce. In a lot of cases, the court will grant an “award of joint marital property”, and a “division of joint marital debts” to one of the previous spouses. If one of the spouses can’t or doesn’t pay those debts, the obligation may still fall on both spouses (if the debt was a joint obligation originally).

So, if one of the spouses doesn’t hold up their end of the bargain and the debts aren’t paid, both spouses’ credit reports can be affected. The creditor can go after both spouses. It may be possible that the late payments, collection agencies, etc will show up on both spouses’ credit reports. This may mean that your credit report may be very badly affected, even if it isn’t you failing to make the payments.

How to protect your credit after a divorce

There are ways that you can protect your credit after a divorce. According to Lexington Law, a credit repair agency, “You can provide your creditors with notice of the divorce and the division of obligations between the parties. For example if your former spouse was awarded the marital home and it is subject to a mortgage held by Bank A, submit a copy of your divorce decree or judgment to Bank A detailing that your former spouse is now responsible for your mortgage.”

So to start out with, you will want to notify your creditors of your divorce (providing proof of this), and which debts are no longer your obligation (again, providing proof).

Lexington Law also says that you are protected if it does come to a point where your spouse does default on one of their obligations. They explain that, in those cases, “the court that issued the divorce decree or judgment may have a procedure to question and remedy the default.” So keep that in mind if your spouse does default on their end, the court may be able to assist you.

Make sure you are protected

Your credit does not have to be part of the collateral damage that comes with your divorce. If your credit is negatively affected by a divorce, know that you have rights. You have ways to protect yourself. Make sure you take the necessary steps to do that. Don’t let your credit go down because of a divorce. If you see it being very negatively affected, you may want to hire a family lawyer and a credit repair law firm to help you.

Nicole has years of experience with all things credit. She has a passion for teaching people about ways to keep their credit reports in the best shape possible.

Remember, if you’re going through divorce and worried about credit – you’re not alone – many other people are out there searching for the same information.

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