A FICO score is a credit score used to measure the creditworthiness of an individual. It was developed in the late 1950s by Fair Isaac Corporation. The FICO score is used by the three major credit bureaus – Experian, TransUnion, and Equifax. It is the most popular representation of an individual’s credit score and is also the most commonly used in the United States. It uses information from an individual’s credit reports and can forecast whether that individual would be able to pay his/her debts.
FICO collates information from an individual’s credit files and the statistically calculated score is used by various banks and other credit providers.
It allows them to make decisions about lending or refusing credit. If you happen to have a low FICO score banks and other credit providers may refuse you credit, or charge rates of interest that are higher. Some may require more collateral, while others may ask for extensive asset and income proof. On the other hand if your FICO credit score is high you may be able to receive loans and mortgages at a better rate of interest.
How Is FICO Score Calculated
FICO takes into account a variety of features from an individual’s past financial record. It does not disclose how exactly it calculates the score but it takes a number of factors into consideration:
· Payment history counts for 35%. If one has delayed one’s mortgage, credit card payments, or loan repayments it will adversely affect the FICO score. Bills need to be paid on time for the score to be high.
· Utilizing your credit counts for 30%. Individuals can improve their rating by reducing their debt to overall available credit ratio.
· Credit/Payment history counts for 15%. The longer credit history a consumer has, more positively it will affect his/her FICO score provided bills are paid on time.
· Managing a variety of credits, such as revolving, consumer finance, counts for 10%.
· Number of credit checks count for 10%. Seeking a number of loans and credits over a short time span leading to a number of credit checks can adversely affect an individual’s FICO score.
Experian, TransUnion, and Equifax have different sources from where they collect an individual’s information and calculate the credit scores accordingly. Therefore you may have three different FICO scores depending on which credit bureau’s score has been used.
FICO Score Range
Maintaining a healthy FICO score is very important. A low score means you pay a comparatively higher rate of interest, or even have your mortgage application rejected out of hand. A high score could enable you to pay a reasonably lower down payment and lower interest rates. However, different loan providers may assess your scores differently and the rates offered may vary.
FICO scores range from 300 – 850. The higher your score the better it is for you. This enables you to bargain for better rates when you are seeking a home or a car loan, a new credit card, or a re-mortgage on your home.