FICO

FICO?

The first time I heard the acronym, FICO, I was lying in my bed watching The Suze Orman Show. I thought, “what in the world is that?” Then she went on to explain that it’s simply a person’s credit score. A California-based company called Fair Isaac Corporation first developed FICO. FICO scores place a value on the types of accounts you hold and your credit history. The FICO scoring scale ranges from 300 to 850, with the majority of people in the United States falling over 600.

There are 5 factors that determine a person’s FICO credit score. First, your payment history—this counts for a whooping 35%--the most of any other factor. Obviously, paying your bills on time is scored as great, while paying them late on a consistent basis is scored as bad. Being referred to a collection agency is worse, and declaring bankruptcy is the worst.

The second factor taken into consideration on the score is exactly how much money you owe, as well as the amount of credit that is currently available to you. They will add up all of your outstanding loans, such as car loans, mortgages, and even school loans and then compare that number to your annual salary. Then, they will add up the amount of credit available to you, and compare it to what you’re currently using. People that use all of their available credit (for example, if all of your credit cards are maxed out) will rate lower than those who don’t. These factors are worth 30%.

The third factor is the length of your credit history. The longer you have had credit, the higher the FICO score will be for this section. In addition, if you’ve had a long-standing credit agreement with one party, you’ll do even better on this aspect of the scoring process. This third factor counts as 15% toward you final score.

The fourth factor taken into consideration is the type of credit mix that you have. For example, do you have only unsecured credit loans (high risk), or do you also have some solid secured loans such as mortgages and automobile loans? Consumers with a mix of credit have higher FICO scores. This fourth factor counts only 10%.

The last factor in the rating is the amount of new applications that you fill out. If you have filled out a lot recently, this will hurt your score because it puts lenders “on alert” that something may be wrong. This part of the score is worth 10%.

Although, lenders typically look at employment, income, length at current residence, and marital status, your FICO score will not be affected by these factors. The prospect of having a bad FICO score should scare anyone who plans on borrowing money for the future. If your FICO score is low, this could mean high interest rates, extra mortgage insurance when buying a home, or in some cases denial of the loan.

It’s not a bad idea to get a copy of your credit report 6 months prior to seeking a large loan, and then look over your history to make sure that there are no discrepancies. If inaccuracies are found, contact the Credit Reporting Agency in writing; they have 30 days to investigate it, and then correct it if they find truth to your claims. You may also want to ask for a revised credit report; they are required by law to supply you with one if an inaccuracy is found and corrected.

 
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