Knowing your Fico Score

In order to avoid the surprise of being rejected for a loan application you must know what your fico score actually is by taking the pains to order your fico score from the comprehensive, combined online 3-in-1 credit report.

Something called Fico Score

In addition to your credit report, the Credit Bureaus also provide a numerical figure called a Fico Score. This figure is a snapshot of your credit risk picture at a particular point in time. Your FICO or Credit score is based on a numeric calculation of the data contained in your credit report. This score attempts to predict whether or not you will repay your debts and this is referred to as your credit worthiness.

A fico score is a credit scoring system developed by Fair Isaac & Co. (hence it’s name) and has become a method of forecasting the probability of credit users meeting their credit obligations. This is now a broadly accepted form of credit evaluation adopted by nearly all financial institutions. It also has the support of the Federal Trade Commission.

The idea of a providing a fico score is to condense a borrower's credit history that is to be represented by a number. This is usually a 3-digit number. The calculation of the credit score, the actual modalities used to arrive at this 3-digit figure is clouded in mystery only known to the credit bureaus and Fair, Isaac and Co. All we know is that a fico score is calculated by using scoring models and mathematical tables and algorithms to assign points for different pieces of information about you and then to arrive at a figure between 350 and 850 which best predict how you would use credit. Of course, experience has taught us that there are certain things you can do as a consumer about your credit profile in order to improve it so as to ensure a high fico score rating.

FICO Scores and Interest Rates

Whenever your credit report is pulled up, points are awarded by a sophisticated computer program based on various pieces of information in the report like how long you have had credit cards, whether you make your payments on time, whether you have missed payments, whether you have reached the maximum on your credit limit, etc., and then a score is produced that your would-be lender uses to assess your credit worthiness. This is called your FICO score. Fico scores usually range between 350 and 850.

The credit industry knows that borrowers with scores above 680 almost always make their payments on time, whereas borrowers with scores below 600 usually develop problems with their payments.

Factors that affect your fico score

Several factors come into play in determining what your fico score is. Among the major ones are:

Recent Inquiries

Too many recent credit report inquiries tell financial institutions that you are attempting to open multiple accounts and this can contribute to a low fico score. However, checking your own credit report does not have any negative effect on your fico score.

Amount of revolving credit

Having a huge amount of revolving credit tends to lower your credit score. It is important to strive to pay down debt in order to have a low credit balance.

Payment history

Maintaining on-time payment record is crucial to a higher credit rating and fico score. If you are going to be late with your payment one time, contact your creditors to let them know. By all means, you want to keep that information from appearing on your report. Your length of credit history is only achieved over the years.

Debt to credit limit ratio

It is important not to max out on your credit limits. You also have to strive to keep your balances low by either regulating your spending or paying off the debt. It is very important, however, not to close accounts that have been paid off. Having zero balances on a number of accounts have  positive effects on your debt to credit limit ratio and therefore on your fico score.

Mixture of credit types

To maintain a great fico score, your credit report should not only be made up of credit card history, but by a good mixture of installment loans, mortgages and credit cards.

Your interest rate is determined by your fico score

Having a good fico score is important not only for borrowing but also for things like insurance. Even if you don't plan on borrowing money immediately, you can be affected by your fico score. Many insurance companies would use a fico score as a factor in determining premiums on life, auto and homeowner's insurance. FICO scores can obviously affect not only whether your loan gets approved but, also, how much you pay for your loan; that is, the interest rate that your loan would attract.

Most of the time consumers do not know anything about credit checking, let alone know anything about the existence of a fico score for them. Lately, however, it has become crucial for consumers to not only know what is contained in their credit report but, also, what their fico score is.  

The lower your fico score, the higher your interest rate. On the other hand if you have a high fico score, you can get very low interest rates on credit cards and loans. Quite a number of major national lenders would usually reduce the cost of their loans by a quarter point or more if a FICO score is greater than 725. If, on the other hand, it is between 690 and 725, they would  reduce the cost only by one-eighth of a point. One point is equal to one percent of the loan amount.

The use of fico scores is very extensive. If you have ever applied for any kind of credit, be it a car loan, mortgage credit card or even insurance, the rate you received was directly related to your fico score. The higher the number, the better you look to lenders. People with the highest scores get the lowest interest rates.

Fair Isaac reports that the American public's credit scores break out along these lines in the chart below. The chart shows the percentage of the consumer public and their fico score range.

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The contents of this website are for informational purposes only and do not constitute an attempt at providing financial advise. Please consult a competent and reputable financial advisor if you are seeking financial advice.