FICO for Everyone
FICO stands for Fair Isaac Corporation and your FICO score determines what kind of credit is available to you and at what interest rate. The name comes from the inventors of the credit risk score, a three-digit number that rates your credit worth; the capacity you have to pay your debts. Consumers often use the term FICO score and credit score interchangeably but they can be slightly different. Effective spending habits are essential because credit is a big responsibility and cannot be taken lightly. It is important to learn exactly what constitutes your FICO score.
What Makes up your FICO Score?
Generally, FICO scores will range between 300 and 850. Higher range scores are greatest for gaining credit and low interest rates. You should take note that Experian, Equifax, and TransUnion – the three credit rating agencies – operate differently when calculating your FICO score. Because of these difference, you actually have three scores instead of just one. These scores differ because credit report information varies between credit reporting agencies.
Elements of Your FICO score:
Payment History uses 35% (Frequency of paying bills on time; Credit Utilization uses 30% (Your credit-to-debt ratio); Credit History uses 15% (When you acquired your credit or loan); Credit Types use 10% (Various types credits you have such as mortgage and credit cards); and Credit Inquiries use 10% (how often lenders check out your credit, when you apply for a new credit card for example).
FICO Scores and How to Change Them
Your scores can change depending on your spending habits. A strong payment history, for example, will give you a higher FICO score, resulting in better interest rates and credit. If there are inaccuracies on your report, be sure to contact each credit bureau to have them removed as soon as possible to minimize a negative effect on your credit score. If you need help with contacting the agencies, you may want to enlist the help of a credit repair company. They can be extremely effective and helpful in contacting the bureaus and following through on the removals, saving you lots of money in the long run by increasing your FICO score.
Other Factors That Affect Your FICO Score
Other factors that affect your score include increased credit card balances, closing credit card accounts (sometimes it is better to leave a card “open” but not carry a balance than to close the account, reducing your available credit), repossessions or foreclosure, reduced credit limits, opening new credit account and collections, tax liens, or debt-related judgments made against you. Keep your FICO score in top shape to get the best benefits you deserve for your credit application. Make sure to spend wisely as it can have a long-term effect on your FICO score.
