Your FICO score impacts your life in obvious ways (getting loans, determining interest rates) and ways that may surprise you. Creditors, lenders and even employers are looking at your credit score and your FICO rating and using them as a basis for potentially life-changing decisions. Because of this, it is extremely important to know how your FICO is calculated and what it says about you.
FICO – A Closely Guarded Secret
The actual formula for determining your FICO score isn’t public knowledge. While some may purport to understand it, the truth is that no one does. Knowing the inner workings of the FICO formula would make it rife for exploitation (something that has happened in the past, and prompted, in part, some significant changes in FICO scoring). But FICO does disclose some general information about what affects your overall score – proof that the calculation is not completely arbitrary.
Adverse Public Records
“Payment history” is the biggest slice of the FICO pie, and the most obvious determiner of your ability to repay your loans. At 35%, your payment history composes over one-third of the factors that go into your FICO score.
Most importantly, FICO keeps tabs on your “adverse public records,” which includes:
- Civil suits
- Wage attachments
- Collection items
- Past due items
The most common way these items show up on your credit history (and therefore your FICO score) is through a court ruling. That’s a judgment. So, for instance, if you have a dispute with a contractor over payment and he takes the matter to small claims court, it won’t show up on your credit history just yet. You still have the chance to settle the matter or get the court to rule in your favor. However, if the judge does rule against you, thereby ordering you to pay delinquent fees, then it falls into FICO’s consideration. Your best strategy is to deal with the matter before it goes to court. It’s in your best interest to talk with a potential litigant and work things out between the two of you.
Obtaining Public Records
So how does FICO get ahold of these records? Court rulings on both the federal and local level are a matter of public record. That means that anyone can view them, given the right resources. Most counties and states have court portals online that allow members of the public to search for judgments. Also, databases such as LexisNexis also maintain records of judgments and liens. In fact, you can pull up judgments pertaining to you (or anyone else) simply by running a database search.
Even so, it’s important to know that only adverse public records are considered. The public can view divorce actions and other civil suits in most states by the same method. But because these matters are not indicative of your payment history, they won’t be considered. Bankruptcies, though, definitely will be.
With most judgments and liens, you can view the amount of the judgment and when it was filed. FICO will also factor in this information. For example, a $5,000 unpaid debt that was late by 90 days will have much more weight than a $30 item that was 6 days delinquent.
Here’s an example of a New York judgment pulled up on a database. This item names Bernard L. Madoff, who you may recognize from the news. Take a look:
If you were a credit reporting agency, you would pay attention to his address and Social Security number (to ensure that it named the right person). You could also see the creditor – in this case, it’s the New York State Tax Commission. This record shows that a judge ordered Madoff to pay $810 to the NYS Tax Commission. You can also see that item has since been paid (that’s what “satisfied”) means. “Released” also means that payment is no longer outstanding.
Another important factor is time. Adverse public records affect your score less as time passes. A judgment will remain on your credit report for 7 years from the date filed. Other records can remain for up to 10 years. So, in Madoff’s case, even though we can pull up this record, since it was filed in May 1989 – over 20 years ago – it no longer appears on his credit report and no longer affects his FICO score. (That whole Ponzi scheme business, though, may give him some trouble.)
Here’s a quick breakdown of how long adverse public records stay on your credit report:
- Missed payments on loans (credit cards, auto loans, etc.) – 7 years
- Collection accounts (delinquent items sent to a collections) – 7 years from the initial missed payment that prompted the item being sent to collection
- Chapter 7, 11and 12 bankruptcies – 10 years from date filed
- Chapter 13 bankruptcies – 7 years from the date paid off; 10 years if not paid off
- Satisfied tax liens – 7 years from date filed
- Unpaid tax liens – indefinitely
- Judgments – 7 years from date filed
- Inquiries (hard pulls on your credit history) – 2 years
These figures are a bit different for New York and California residents. For current California residents, unpaid tax liens go away after 10 years while paid tax liens disappear after 7 years from the paid date. For New York residents, satisfied judgments stay on file for 5 years after they were filed while paid collections disappear after 5 years of inactivity.
As you can see, even a satisfied judgment or tax lien can be a black eye that lingers for several years. So, remember – the next time you have a dispute with someone over payment – settle, settle, settle! Don’t let items go to court and definitely don’t lose if you do end up in front of a judge. It can put a dent in your FICO score for years.
Photo by steakpinball.