FICO scores

If you listen to main stream media or any number of commercials you will here about how important you FICO score is. Your FICO score is a measure lenders use to determine you ability to pay back a loan. However there are major problems with a FICO score.First, let’s look at what makes up your FICO score. Fair Issac’s website, the inventor of the score, tells us the basics. They won’t release the actual formula.

  • 35% is based on your history of paying your debts.
  • 30% is based on how much you owe.
  • 15% is based on how long you have had debts.
  • 10% is based on how much new debt you have taken on.
  • 10% is based on the type of debt you have.

Notice that the only way to get a score is to be in debt. I have already posted here on how debt is not a smart tool. One thing that jumps out at me here is that no where in the formula does it matter how much you make. What is you number one most effective tool for paying off a loan? Your income! This isn’t even taken into account.

The second problem is that most credit reports have errors on them. Some are minor, but most are adversely affect the score.

So the banks and lending institutions are basing a decision on your credit-worthiness on faulty information and aren’t taking into account your income. I highly recommend you pull your credit report from all three agencies at least once a year and then clean up whatever messes are there. Go to annualcreditreport.com to pull it. This will not give you a credit score, but will give you a full report. This is a free service, once a year, from the federal government. There is a website called Free Credit Report.com, but it is a fee based credit monitoring service. DO NOT USE it, unless you have money to throw away.

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