One of the more puzzling questions people have about their credit rating is how is my FICO Score calculated? After your bankruptcy is discharged, you will begin the process of rebuilding your future. As part of that process you should know what makes up your FICO score. Your FICO Score is one of the main factors that lenders look to if you want to get a mortgage or a car loan. Here are the factors that comprise this important number:
- Payment history 35%: This is arguably the most important thing creditors will look at … have you been paying your accounts on time. If you’ve had late payments, then less recent those occurred, the better.
- Amounts Owed 30%: Your amount owed is also used to calculate your debt to income ratio. So, if you make $40,000 per year and you have $22,000 in credit card debt, your debt to income ratio is high. If you owe $22,000 and make $150,000 a year, it’s a lot lower. The amount you owe is important, but it’s all relative to income. So your amount owed is looked at side by side with your income.
- Length of Credit History 15%: Your FICO score will take into account the amount of time each of your accounts have been opened as well as how often they’re used. One that has been opened for a long time but never used won’t give you as high a score as one that has been opened for less time but used more often. But that doesn’t mean you should use all of your accounts all of the time. It just means that they want to see responsible use of credit over a long period of time. So, if you have old accounts, use them from time to time to keep them working for you. If you have only have new accounts it’ll take you longer, but just stay on top of them and pay them on time whenever you use them.
- Types of credit in use 10%: This factor looks at the number of credit cards, retail accounts, installment loans, mortgages and finance company loans you have. It’s not important that you have one of each and this won’t be a huge determining factor in your credit score. But when there’s little else to look at this mix is viewed and scored according to diversity.
- New Credit 10%: Opening several accounts in a short period of time is viewed as risky and will get you a lower score, especially if you don’t have a long credit history. And now you know! Focus on #s 1 and 2 above. Basically, pay on time and don’t go crazy opening new accounts as you rebuild. Best to look at this like a slow (ish, really not that slow) and STEADY climb up a hill. It’s not Everest. Just a hill. You can do it!
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.