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Marriage and Money

Managing your family budget: What's a FICO score and how is it calculated?

In the next article in our family budget series, we share information to help explain your credit score, what it means, and how your financial habits can impact it.
Your household budget is made up of many different factors. And while you may not think of your FICO credit score as part of your family budget, it is. For example, a healthy FICO credit score can make you eligible for lines of credit when you need it. It can also allow you to take advantage of lower interest rates on major purchases such as a vehicle or a home loan - saving you money!

But what exactly is your FICO score?

Your FICO score (an acronym for Fair Isaac Company, the company that created and computes the credit score), is a numeric ranking that makes up a substantial portion of your credit report that lenders use to assess you as a credit risk and whether to extend your credit.

Here's how your FICO score is calculated:

Credit Score

Source: http://www.myfico.com/credit-education/whats-in-your-credit-score/

Your FICO Score is calculated based on these five categories. For some people, the importance of any one factor in this calculation depends on the overall information in their credit report - such as number of late pays, collections, bankruptcy, amount of debt, and age of credit accounts. Moreover, as the information in your credit score report changes, so will the importance of any one of these factors in determining your score.

Establishing a solid credit profile can be something of an art. When you understand what makes up your credit score, you can budget accordingly and make smarter decisions about your credit and spending habits. If you have bad credit, this information can help you break bad habits and start fixing your financial history now. That way, you can begin reaping the benefits of good credit as soon as possible.

 

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