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One very important element in your overall credit worthiness package is your FICO score. But what exactly is that and how does it affect your debt management choices?

FICO is an acronym formed from the letters of its founder, the Fair Isaac Corporation. It is a number between 400 and 800 that ranks credit worthiness according to a proprietary algorithm invented by the company, with 400 being worst and 800 being best. Other companies now have their own variations.

A clear explanation of how the algorithms calculate your credit worth has never been disclosed to the general public. However through cause and effect some have been able to deduct some factors that can affect your scores. It has been noted that your number of credit cards or the number of credit checks run can have a minimum affect your rating. However, late payments, especially payments received extremely late, have a much greater impact on your scores. Also, your overall debt amount is an important factor that has great impact.

Any score below about 620 is considered marginal and below 580 is decidedly poor. 720 and above is very good to excellent. A range between 620 and 720 represents a kind of gray area, where items other than your FICO will play a more significant role in loan decisions.

Lenders of all types, credit card companies, mortgage companies and banks rely heavily on your FICO when determining whether to extend you credit or loan you money. Your scores also have an impact on what interest rate you will be offered.

Of course, many times all other things are not equal. Prevailing interest rates in general, the current demand for loans, the general economy and other factors have a heavy influence on the willingness of lenders to lend and at what rate.

The ever growing reliance on computers and modern technology in the finance world has changed the underwriting of loans dramatically. In addition, the Internet has greatly influenced the world of finance. These two variables have put a new face on the lending industry in recent years.

Despite all these changes, or possibly because of them, your FICO is a key factor considered by lenders. Though it is not the only thing considered, it carries a lot of weight in deciding whether or not you will be approved for a loan.

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Companies throughout the world all operate under the same principle which is to make money, but more than that, to turn a profit. Making all the money in the world doesn’t do you any good if you’re still spending more than what you make, and this is the same in personal financing. You’re very much like your own little company. You have expenses and revenue, and these need to be properly balanced to keep you out of the red.

When companies are first getting off the ground, it usually takes some time before they begin to turn a profit. An initial loan or funding is used to get the company off the ground, get the concept launched and the word out there about the service or product. The rate at which this initial funding is spent is often referred to as the burn rate. The faster the funding is burned through, the quicker the company must increase revenue to counter it, or the company will not long survive.

The trouble with personal financing is that increasing your revenue is not quite as easy as it can be for a company. Unless you take on an extra job or get a higher paying one, your revenue is going to be static. For this reason your burn rate must be minimal. Using up your resources too fast will leave you unable to manage, where upon you’ll reach the equivalent of a company going out of business, bankruptcy.

This wasn’t so much an issue in years past, where credit was harder to come by. With no credit, it was all but impossible to spend more than you were earning. But in this era of cheap credit, that’s no longer the case. You can easily live above your means for a long stretch of time, as many people have, eventually hitting the end of the line where even the credit gives out and you hit rock bottom.

The other thing that separates you from a company is that you have something that must be planned for long term, which is you retirement. So not only do you need to not spend more than you earn, but you should be spending less than you earn. As long as a company is at least breaking even, they’re not in terrible shape. Their stockholders may not be happy, but ultimately they’re no worse off. They don’t have that end goal that must be met like you, and the time is always running out on meeting that goal.

Since time is of the essence, you must be setting aside a certain amount per year, which could be called your profit margin. Based on your income and how much you want saved away for your retirement, you could be looking at a desired profit margin of anywhere from 5-10%, which will be used to fund investments.

If your current profit margin simply isn’t cutting it, then you need to cut your expenses. Again, you don’t have the luxury of increasing revenue, so this is the one option open to you to reach your margin. This is again all about balance. You need to cut expenses in a way that won’t be detrimental to your living, by cutting things you can do without. For example, you can start by reviewing your current credit card balance. What extras have you been buying that could be cut out? The opposite of poor retirement planning is over planning. Do you really want to live like a hermit for 20 years just so you have a few comfortable years at the end of your life? Make a plan that’s comfortable and that you can stick to. If that means working a few extra years or something along those lines, then so be it.

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Knowing your credit score is an important thing, but that knowledge is absolutely useless unless you understand what the score means. If you don’t have knowledge of how to increase credit score, you will never be able to compete in a financial world that requires credit. All of the financial and credit-related decisions that you make combine to create your credit score.

Once you’ve viewed your FICO report score, you will realize how you are affected by certain things like use of a secured bank card or a portable mortgage. These things greatly impact generic scoring models. Whenever you affect your FICO score negatively or positively, you will see the impact last for a long time.

Credit Cards Influence Your FICO Score

Credit cards can really affect your FICO score. Using your credit cards frivolously will result in horrible credit scores with all three companies. Credit cards hugely influence the FICO Experian score as well as on the other credit bureau scores.

You need to pay attention to your credit cards every month. Most people only have small payments, but you still need to pay attention to them.

With that in mind, consumers have a chance to positive impact their FICO free score with their credit card use. When consumers come in and ask “how to raise my credit score”, the majority of credit repair clinics will tell them that getting a small credit card and paying the balance each month is a great way of fixing credit score problems.

On the other hand, credit cards are responsible for many people’s financial problems. It is amazing the volume of people who complain “credit cards killed my FICO score”. Your score decreases every time you either miss a payment or make payment late.

Your credit score can significantly drop because of one or two missed payments in the past. Also, the credit amount on the credit cards is also significant.

If you obtain too many charged cards (more than three), lenders will see you as a bad candidate for credit. Instead, it is better to have only two cards and use them cautiously.

Loans and My FICO Score

All of the many kinds of loans will affect your credit score at each of the three credit bureaus. In order to raise your FICO score at each of the credit reporting agencies, it is crucial that you consistently make timely payments on your loans. Student loans and mortgages are usually reliable loan types that show strength of credit to other creditors. Your credit bureau will create a positive impression for future creditors if you are able to pay and manage these two types of loan.

The other side of that has to do with the size of these loans. Mortgage loans, in particular, are large loans. If you do happen to fall behind on one of these or you happen to go through voluntary repossession, then your credit score will take a major hit. My FICO score is strong because of a long standing mortgage loan, but I’d shudder to think of how low it would go if I were to default on that loan. In addition, consumers would be smart to keep track of personal loans like they do a credit card. These loans are much more unstable and if you lose track of them, your FICO credit score will struggle.

My FICO Score Can Be Altered By Credit Inquires

Unknown to many people is the fact that each and every time they apply for a credit card or for a loan of any kind, it will appear on their credit report. No matter whether they are approved or denied, consumers’ FICO score can be affected simply by filling out the paperwork. It’s not worth the free t-shirt being offered if you apply for a new credit card that isn’t actually necessary. Applying for numerous loans indicates instability and causes your FICO score to drop as a result.

Being turned down for a credit card or loan is even more detrimental to your credit score. When you are rejected for a credit card, it hurts your score a little bit more than an inquiry does. If you are turned down several times, your rating will drop 20 points or more.

My FICO Score and Credit Balances

Using all or most of your available credit will have a negative outcome. Using more than half of the available balance typically causes your score to drop. In the case of high limit cards, these balances are more extensive and likewise have a more substantial impact on your score. Many people ignore card balances though they have a large impact on FICO scores.

You can establish a good payment history by carrying a small balance on your credit card. You are considered a credit risk if you begin using all of your available credit. These are the real intentions of my FICO score. When it comes down to it, these are the real intentions of my FICO score. It quantifies the level of risk for lenders so they can make sound business decisions.

The Serious Stuff

While missing payments and having high balances will impact your credit score some, nothing will hit it harder than serious things like tax delinquencies, bankruptcy score filings, repossession of your property, or a serious loan default. If you are forced to go through bankruptcy, then you can expect that the next time you use a FICO calculator, your score will be in a very low place.

Bankruptcy causes a lower FICO score, usually 500-600, and makes it difficult to get a loan. Credit repair companies can help you understand your options if your credit has been impacted by one of these serious circumstances.

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