What is a FICO Score?

When applying for a loan, we usually see the word FICO everywhere, but not surprisingly, many people don’t know what it means.  And the FICO score is one of the most important factors taken into account by a lender when considering extending credit to you. So what exactly is a FICO score, and in what manner does it affect your credit worthiness?

FICO is actually an acronym formed from the letters of its founder, the Fair Isaac Corporation. FICO is a number between 400 and 800 that ranks credit worthiness according to a proprietary algorithm created by the Fair Isaac Corporation, where 400 is the worst possible score and 800 is the best. So the higher the FICO score, the better options you will have.

Even though the details of the algorithms have never been disclosed by the founders, over time many people (through detailed observation) have “reverse engineered” many of the important factors that make up the magic number. Some are common sense, for example, late payments will lower your score, non payments will lower it even more, the more late payments the more heavily the score will be affected. Obviously, a bankruptcy or foreclosure will lower your score even more.

The combined amount of debt owed (credit cards plus other loans) is another very important element. Another factor is the number of credit cards and credit checks performed.

A score below 620 is considered bad and below 580 is decidedly poor. A score of 720 or higher is very good but you should aim to have a score of over 800. A range between 620 and 720 will be open to the decision makers at the loan company, and they will most likely start considering other items in more detail. But the interest they will charge you will be higher.

Virtually all Banks, mortgage companies, credit card companies and other lenders will consider your FICO score to decide whether they will approve the loan and what interest rate they will charge you. Other things being equal the higher your score the better interest rate you can obtain. This is the main reason why it’s critical for you to fix any errors that may be in your report.

But there are many other factors involved, like the current demand for loans, prevailing interest rates in general, the overall economy and so on, that can severely affect not only the rate but also whether they will give you the loan or not. And in some cases, you may be denied a loan while 30 days later another bank would be happy you give you one.

Regardless of all these factors, the FICO score is always the most important tool that lenders use to make a decision.

If your FICO score is low, you need to work on fixing your credit report as soon as possible. There are many things you can do to raise your credit score, and you should make it a priority.

How to raise your credit score

Imagine applying for a car loan, and receiving a higher interest rate because of your score. It can cost you several hundred dollars in extra interest! Imagine if you had just a few points more, say from 695 to 700. I hope that by now, you can clearly see that improving your credit score BEFORE applying for a loan can save you hundreds (sometimes thousands) of dollars over the life of a loan.

The easiest thing to do would be to get a program that teaches you exactly what to do and how to do it, it will save you a lot of time (maybe months?) and frustration. Take a look at this option.

You can definitely do it yourself; it may just take you longer. The first thing you need to do is get a copy of your credit report, to see where the problems are.

As you work to remove those outstanding overdue debts – either through paying them off or negotiating with the lender – you will raise your credit score (FICO) slowly but surely. How late your bills are (30 days late, 60 days late, 90 days late or longer) is a big factor in calculating your FICO.

At the same time, you can shop around for lenders willing to take a higher risk by lending you money. The downside is those loans almost always carry a higher interest rate. Your best approach is to try to forego borrowing for as long as possible while you work to improve your debt situation. Your FICO will follow suit.

A few key points that will help you dramatically improve your credit score.

1- Keep only 2 credit cards. If you need to cancel a credit card, always keep the older ones.

2- On your credit cards, if you carry a balance, try to keep it under 30% of your credit limit. This is very important; users with their credit cards maxed-out are considered high-risk.

3- Make sure your credit cards show the correct credit limit on your report; if they don’t, send them a letter so they can correct it. This is also very important, since it can significantly lower your FICO score!

4- Look for errors, and make sure you dispute them! This is YOUR information after all, so make sure it’s correct.

5- By all means, always -and I mean ALWAYS- send your payments on time, especially your mortgage payments. This is the very first thing lenders look at. Late payments lower your score dramatically.

You need to raise your credit score. Start working on it today. You will be so glad you did!

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