Ronnica Rothe is a graduate with honors from the University of Oklahoma and a current student at Southeastern Baptist Theological Seminary. She works with Vision Credit Education to help individuals get out of debt and reach their financial goals.
If you are a consumer in the United States, chances are you have a FICO score. FICO stands for Fair Isaac Corporation, the brains behind the formula used to score personal credit by the three major credit bureaus: Equifax, Experian, and TransUnion. Fair Isaac does not release the formula, but some helpful details of how the scores are figured are known.
There's not just one FICO formula, but ten. While all the same factors go into each, the formulas vary base on different elements, classifying consumers into 10 different categories. One such category is believed to be bankruptcy, so that all people who have recently filed or been discharged from bankruptcy are compared together to determine their individual credit scores. This complicates credit scoring, because someone with a bankruptcy may have a higher credit score than someone else because they compare better to their peers.
The major component of anyone's credit score is payment history. The less frequently you have made a payment late, the better your credit score. Other factors that go into your credit score are credit usage (how much of that credit available to you are you using, meaning how much you owe), credit history (the longer you've had credit, the better), the types of credit you have, and recent attempts to gain credit (these can be seen as indicators of potentional financial trouble).
While the credit scoring model is not perfect, it is important to understand how it works and how it affects you if you are seeking to obtain credit now or in the future.
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