Prospective clients often ask how their actions will impact their credit score, that three digit number between 300 and 850 that is supposed to reflect your credit worthiness. Much of what makes up the credit score is deliberately kept secret by the privately held corporation (Fair Isaac Corporation) that started developing credit scores in the 1950s. The three credit bureaus (Equifax, Experian, TransUnion) and individual creditors may also have different scores because they use a different credit score model or because not all creditors report to the same bureaus. But we know generally that the FICO score created by Fair Isaac is made up of the following factors; (1) 35% of the score is based on your payment history, e.g. late payments, the length of time since something negative occurred, the number of delinquencies and the number of negative public records regarding debt; (2) 30% of the score is based on the ratio of credit used to the credit available, e.g. how close are you to the maximums on credit cards and the number of open credit accounts; (3) 15% of the score is based on the length of your credit history including how long accounts have been opened; (4) 10% of the score is based on new credit, e.g. how many new accounts have been opened or applied for recently, possibly meaning an overextension of debt; and (5) 10% of the score is based on the mix of accounts, e.g. a variety of different accounts like a mortgage, car loan and revolving credit card accounts.
Thankfully there are efforts underway to restrict how credit scores can be used. Evidence suggests that credit score models discriminate against minorities and the poor. Several states have also passed or are considering legislation prohibiting credit scores from being used in employment, insurance and other situations. And some people are rejecting America’s credit score obsession altogether by eliminating all or most of their debt. By paying cash for everything they’ve ruined their credit score but freed themselves from the constant worry about how bills will be paid.