What Is A FICO And Will It Hurt Me?
The first time I heard the term FICO, I had no idea of it's
meaning. Simply put, it's your 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.
The majority of people in the United States have FICO scores
over 600.
There are several factors that determine your FICO credit score.
First, your payment history--this counts for a whooping 35%--the
most of any other factor. If you pay your bills on time, you are
scored as great, but if you pay your bills late on a consistent
basis you are scored as bad. And if you are referred to a
collection agency, this is even worse, and if you declare
bankruptcy, this the worst rating of all.
The second factor taken into consideration for your FICO 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 how long is your credit history. The longer
you have had credit, the higher your FICO score will be. 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? People with a good
mix of credit have higher FICO scores. This fourth factor counts
only 10%.
The last factor in the rating is the amount of new loan or
credit card applications that you have filled 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%.
Lenders will typically look at employment, income, length at
current residence, and marital status, but your FICO score will
not be affected by these factors. Having a bad FICO score should
scare anyone who plans on borrowing money for the future. If you
do have a low FICO score, this could mean high interest rates,
extra mortgage insurance when buying a home, or in some cases
denial of the loan.
It's a good bad idea to get a copy of your credit report 6-12
months before applying for a large loan, so you can look over
your history to make sure that there are no discrepancies. If
you do find inaccuracies, 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 should also ask for a
revised credit report; they are required by law to supply you
with one if an inaccuracy is found and corrected.