Wednesday, November 29, 2006

The Basic Of FICO Credit Score

It is worth to know about FICO Credit Score since it can affect the interest level that we need to pay when we apply for a new loan. FICO Credit Score is one of the most widely used individual Credit Score System currently in the US. Other Credit Score Systems include NextGen and Vantage Score. It's developed by a Minneapolis based consulting firm Fair Isaac Corporation.

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 US falling around the 600 level.

There are 5 factors that determine a person’s FICO credit score:-

1. Our payment history — this accounts for about 35% of the factor - 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.

2. The second factor is exactly how much money we owe, as well as the amount of credit that is currently available to us. These factors are worth 30%. They will add up all of our outstanding loans, such as car loans, mortgages, and any other loans that we have and then compare that numbers to our annual salary.

Then, they will add up the amount of credit available to us, and compare it to what we are currently using. People that use all of their available credit (for example, if all of our credit cards are maxed out) will rate lower than those who don’t.

3. Third factor is the length of our credit history. The longer we have had credit, the higher the FICO score will be for this section. In addition, if we have had a long-standing credit agreement with one party, we should gain more points on this aspect of the scoring process. This third factor counts as 15% toward you final score.

4. The fourth factor is the type of credit mix that we have. For example, do we have only unsecured credit loans (high risk), or do we 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%.

5. The fifth factor in the rating is the amount of new applications that we fill out. If we have applieed for too many loans or credits recently, this will hurt our 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, our 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.
Hopefully this short explanation can help you understand what FICO is all about. To learn more about credit score, you can go to . And of course you can always watch the Suze Orman Show aired on CNBC every week to learn more on FICO as well.


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