A FICO Score is at the root of whether or not you are accepted or denied credit or a loan and whether you will receive higher or lower home and auto insurance rates. Short for Fair Isaac Corporation, the company that invented the credit risk score, the three-digit number defines your creditworthiness or the likelihood that you will pay your debts. Your FICO score is calculated from information contained in your credit reports. That’s why it’s so important that all information listed in your credit reports is correct and complete.
The Makings of a FICO Score
A FICO score ranges between 300 and 850, with scores on the higher range of the scale the best for obtaining credit and low interest rates. Because each of the three credit rating agencies – Experian, Equifax and TransUnion – operate separately and collect data about your credit independently from each other, you actually have three FICO scores. The scores may be different because information in your credit report may vary between credit reporting agencies.
According to FICO, a FICO score is a calculation comprised of various elements and formulas, including the following:
Payment History – 35% (how often you pay your bills on time);
Credit Utilization – 30% (the amount of debt in use versus the total amount of credit available);
Credit History – 15% (the length of time from when you first established credit, such as a loan or credit card);
Credit Types – 10% (the different types of credit you have, such as a mortgage, revolving credit, installment loans, etc.);
Credit Inquiries – 10% (the number of credit searches conducted by lenders).
The Highs and Lows of FICO Scores
FICO scores can increase and decrease according to various activities that fall under the elements listed above. For example, if you made one or more late payments, your FICO score could go down. On the other hand, if you pay your bills on time, over the years your FICO score will go up. When you request your FICO score, it includes an explanation about the positive and negative areas that affected your score. Keep these reports from year to year to compare these factors.
Some other factors that impact your FICO score are:
-Closing credit card accounts;
-Reduced credit limits;
-Increased credit card balances;
-Collections, tax liens, or debt-related judgments made against you;
-Repossessions or foreclosures;
-Opened new credit accounts.
Sometimes, your FICO score will drop through no fault of your own. That’s when you need to check your credit reports to see if they contain any errors. You can do this on your own or by using a credit repair services. Whichever avenue you choose, it’s important to act fast and repair your credit before your FICO scores are severely impacted.