Evaluating Your Credit

Evaluating your credit is an important process that involves more than just learning your FICO score. Your credit represents a major part of your overall financial condition, and it is comprised of many elements such as employment history and current income.

Your credit report is a record of your credit history based on information from lenders you have had accounts or loans with. Your report will show the data these lenders have on your credit history, as well as whether you have applied for additional credit. Your credit report also contains personal information to identify you, including your address and social security number. Evaluating your credit report can help you ensure that it presents the most accurate information.

Your credit score is a number generated based on the information in your credit report. Typically, FICO Scores are used, which indicates that the software used to calculate the score was created by Fair Isaac Corporation. Your FICO Score can range from 300-850, and the higher it is, the better.

Assessment of your credit score is based on multiple aspects of your financial profile. Details of your payment history are analyzed, such as timeliness and consistency. Also factored in are the length of your credit history, the amount of total debt you owe, which types of debt (i.e. mortgage vs. credit cards), and whether you have recently obtained new debt.

The contents of your credit report – as well as your credit score – will provide vital information to help you accurately appraise your financial state.


What To Look For

There are many sources for obtaining a credit report. Your credit report can be obtained from many different vendors including our firm. The credit report will give you an idea of the payment history and contact information for most of your creditors. It is also useful to review your report periodically to make sure it is accurate.

As a general rule, if you make late payments your credit score will go down. The further behind you fall on payments, the lower your score. High balances, judgements and collections also have an adverse affect on your credit score along with the types of accounts you have. For example, a mortgage is much more attractive to the bank versus credit card debt. Mortgage debt is secured by a generally appreciating asset whereas credit card debt is a reflection of having an issue with cash-flow.

If you go to a bank they are not only evaluating your repayment history but also your ability to repay additional debt. Banks use a formula when lending money and most will not lend you additional funds if your debt ratio is too high. A good rule of thumb is to keep your monthly fixed debt obligations at less than 40% of your gross income. Living expenses make up the other 60% as well as ordinary payroll deductions. If a bank will not lend you money, that is a good indication that you have too much debt. In that instance, bankruptcy could be the solution.