FICO Basics

by Dual Income No Kids on February 19, 2007 · 0 comments

Today’s posting is about the FICO score. The term FICO stands for the Fair Issac Corporation score. The chances are that you if you have a credit card, a loan or any sort of borrowing history, you probably have a FICO score. It is the most widely used means of measuring credit worthiness in the US. Since everyone looks at the FICO and since you probably have one, it pays to know a bit more about this little number.

The FICO is a measurement of your creditworthiness. It typically ranges from 300 to 850 and is based on a mathematical formula largely determined using your current debt load, payment and credit histories. More specifically, the top 5 factors impacting your FICO score are:

1. Payment History
2. Amounts Owed
3. Length of Credit History
4. New Credit
5. Types of Credit In Use

The actual calculation of the score is complex, it does follow some guidelines.

For example, if you pay your bills on time you’re score is increased. If you’ve ever filed for for bankruptcy or if the courts have come after you for money, your FICO score suffers. Also if your bills are late, then you’re marked down. Similarly, if you owe a ton of money, or have high balances on a lot of accounts, your FICO score is reduced.

There’s more! A longer credit history will improve your score. Similarly, attempts to get new credit reflect negatively on your FICO. As regards the fifth factor, if you have a variety of types of credit in use, this tends to positively impact your score. Payment history, amounts owed and length of credit history are the most important factors. New credit and credit types in use are less important.

The FICO score is supposed to be blind to demographics (age, race, etc.), where you live and what kind of job you have. But, its silly to think these factors don’t matter. For example, these factors will come in play if you try to get a loan, so its important to keep these in mind.

Finally, its not just a number. The FICO matters. It matters because it is one factor that impacts the price you pay to borrow money. For example, if you have the best FICO score possible (760-850), your interest rate can be nearly 3% smaller than someone with a FICO of 579 or less. A 3% difference can add up to a LOT of money over life of loan.

For more details, check out the wikipedia entry on credit scores or go to myfico.com.

Happy Surfing!

Best,

James

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