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FICO Credit ScoresWhen it comes to talk about home loans, car loans, and credit reporting in general, you ofter hear the word "FICO score". What is a FICO credit score? FICO (rhymes with "sky-co") stands for the company that prepares credit ranking for the financial industry, a company called Fair Isaac Corporation, named after its founders Bill Fair and Earl Isaac. FICO has been around for almost 50 years, providing consulting and decision making tools, of which the FICO credit rating is their most well known product. FICO scores, determined by a variety of factors, determine the interest rates banks and other lenders will offer you when you are looking for credit, whether for a home, car, or equiy loan. FICO scores range from 300-900, with a higher score being better. In this guide, we will take a look at how FICO scores affect your loan rates, how you can improve your FICO score, and what factors affect your FICO score.
How do FICO scores affect my loans?Since FICO scores measure credit worthiness (ie, the likelihood that you will repay your loans on time), banks and other financial institutions base their loans and loan rates in part upon your score. In fact, many lenders have FICO cutoff points that offer automatic approval if your score is higher than a certain benchmark (perhaps 750), making the loan process much more streamlined and efficient. How much can rates vary based on credit scores? As an example, if you want to borrow $200K for a 30 year home mortgage, your FICO score would result in the following approximate loan rates and mortgage payments:
What Affects My FICO Score?You can download a free credit guide called "Understanding your FICO score" at MyFico.com. We suggest you check it out to understand how credit scores are compiled and how they affect you. When you apply for credit, lenders consider many factors, such as your employment and income, your credit history (largely from your FICO score), your outstanding debt, etc. So you could get a loan even with a low credit score, or you might be declined for credit even though you have a high credit rating (ie, you are also currently unemployed, have lots of debt, etc.). While some people feel they should not be evaluated based on a number, a number based on your actual credit and payment history is a better way to judge borrowers instead of on your nationality, age, or gender. That's what FICO scores offer - a clean, quick, unbiased opinion of a persons creditworthiness based upon their actual history and behavior. How is a FICO score calculated? Your FICO score factors in a variety of data - 35% is based on payment history, 30% is based on how much debt you have, 15% depends on length of time you have had credit accounts, 10% depends on how often credit application and inquiries are made on your account, and another 10% is based on the type of credit history you have, whether credit cards, student loans, auto loans, or home mortgages. Older credit history and problems count less that do more recent history and activities. Bankruptcies and late payments affect your score negatively, and it can be a quick, large decrease in your score. Improving your FICO score takes longer and is a slower process, so don't think you can balance out a few missed payment with 6 months of paying on time -- it doesn't work like that.How can I improve my FICO score?The first step in improving your credit is checking your credit report each year and fixing any errors that might be there. Where can I get a free credit report? You can get a free credit report each year from the 3 big credit bureaus -- Equifax, TransUnion, and Experian. To get your free credit report, go to AnnualCreditReport.com - this is the only, official website to provide this service, so don't be fooled by others. In fact, if you go to the official Federal Trade Commission (www.FTC.gov/credit) government site, you'll find warnings about sites advertising terms like free credit report, free credit report, free credit score, free credit check, free credit report online, luring in unsuspecting web surfers, and then trying to charge them a fee for these reporting services. Don't fall for it. If you are more comfortable doing it offline, you can also call 877-322-8228 to get your free annual report. Doing the free online credit report check is pertty easy - you have to enter your personal information, including social security number, on the secure AnnualCreditReport.com site, and they will then connect you directly to Experian, Equifax, etc. Be careful on those sites -- after confirming your identity, they will try to throw in some paid packages, like $10 for your FICO score or whatever -- you don't need to pay for anything, just keep clicking the buttons for your free credit reports. You can view them online within minutes. You can check out a free online FICO score estimator here -- they will try to sell you some credit service after they give you your estimated score, but you don't need to pay anything for the estimate and no personal information is collected.So once you figure out your score and make sure your report is correct, you next goal may be to improve your FICO score to lower your credit expenses. Remember 35%, the biggest chunk, of your rating comes from your payment history - on time vs. late payments, any bankruptcies, etc. So rule #1 is always pay bills on time and in full. Good credit management is much like good financial management, which starts with living within your means. If you are missing payments or making late payments, you either need to get another job and earn more income or start spending less. If you have missed payments, get current and stay current to help improve your FICO score. Next, remember that FICO scores also heavily weigh the amount of debt that you carry. Are your loans almost paid off, or are you using 100% of your credit card balances and your home has been continually refinanced, resulting in you having little or no equity? So pay down some of those credit cards to demonstrate you use credit as a tool as not as a way of financing your over-extended lifestyle, which could collapse at any time. If you have older credit cards, pay off their balances and use them from time to time, but don't close the accounts (longer patterns of credit history are more valuable). Don't apply for a bunch of new credit cards or loans just before applying for a home mortgage -- all those credit inquiries on your record reduces your FICO score and can scare off lenders.
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