FICO, What is That?

One of the most important elements in your overall credit worthiness package is your FICO score. But what exactly is the FICO score and how does it affect your debt management choices?

FICO is an acronym formed from the letters of its founder, the Fair Isaac Corporation. It is a number between 400 and 800 that ranks credit worthiness according to a proprietary algorithm invented by the company, with 400 being worst and 800 being best. Other companies now have their own variations.

Though the details of the algorithms were never officially disclosed, over time many people have reverse engineered many of the important factors. For example, any late payments will lower your score, and the more of them and the later they are, the more heavily the score is affected. The total amount of debt carried per month is another element. A less important factor is the number of credit cards and credit checks performed.

Any score below about 620 is considered marginal and below 580 is decidedly poor. 720 and above is very good to excellent. A range between 620 and 720 represents a kind of gray area, where items other than your FICO will play a more significant role in loan decisions.

Banks, mortgage companies, credit card issuers and other lenders will use your FICO score as a very important criteria for deciding whether to give you a loan, and at what interest rate. Other things being equal the higher your score the better interest rate you can obtain. This is why it's so important that you fix any errors your report may have.

Of course, many times all other things are not equal. Prevailing interest rates in general, the current demand for loans, the general economy and other factors have a heavy influence on the willingness of lenders to lend and at what rate.

Even with all these factors, the FICO score remains a primary tool for lenders. In some instances it may not determine the final decision, but it definitely influences the 'first cut' when presented with a stack of applications to approve or disapprove.

Fortunately for those who have financially slipped, there are alternatives. Though your FICO may be low you nonetheless have several options. The first thing to do is set into motion a plan to improve your score.

As you work to remove those outstanding overdue debts - either through paying them off or negotiating with the lender - your FICO will gradually improve. The age of 30 day past due, 60 day past due (or longer) late payments is a 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 2 -maybe 3, max- 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 on your mortgage. This is the very first thing lenders look at. Lates lower your score dramatically.
6- Get the Credit Secrets Bible. As you read it, you will learn cutting edge credit repair information that will help you restore your credit rating very fast. We have heard of people that raised their credit scores by 80 points in just 60 days! Highly recommended if you want to raise your credit score or simply learn more about the credit system, so you are ready for future purchases.

You can also read Credit Reports and What They Mean To You

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