W. M. Blake asked: Your FICO score is one of the most important components of your overall credit rating. Most people have little or no idea what it is or how it’s calculated, however.
FICO gets its name from its founder, the Fair Isaac Corporation. It is a number that falls between 400 and 800 indicating a person’s credit worthiness – 400 being the least worthy and 800 being the most. There are variations of the calculation used by other companies, but FICO is still the most widespread.
The specific calculation is a closely guarded secret, but people have been able to figure out many of the important factors by reverse engineering the score.
Late payments will cause the score to drop. The later they are and the more common they are, the larger the drop.
Another element of the FICO score is the amount of debt being carried, relative to the total you have available to you.
A score falling below 620 is considered below average and anything under 580 is a poor score. 720 and up is considered to be very good. The range between 620 and 720 is less defined, and if your score falls in this range other factors will often hold more weight in credit decisions.
Mortgage companies, banks and credit card companies all use the FICO score as a significant factor when you apply for credit. Your score can also have an effect on how good an interest rate you are offered.
Over the last two decades, the lending industry has undergone some significant changes. The increased use of computers, and particularly the internet, has caused some major changes to be made.
This is quite likely one of the reasons the FICO score is considered so important – it is a relatively cut and dried way for credit worthiness to be determined quickly and with no personal interaction with the applicant.
If your FICO score is not as good as you would like, there is really no fast solution. As you pay off your debts and make your payments on time over a period of time, your score will gradually increase. It’s a matter of being responsible and ensuring your payments are not late or missed altogether.
Erica
