My Debt Relief Plan

What is a FICO score and why is it so important? For those in the credit industry, knowing what a FICO score is can help a lot in maintaining a healthy lending business. That is because the FICO score is being used in order to assess a person’s credit worthiness. Lending money to people is always a risky endeavor. Lenders always have the fear of never ever getting back the money that they have loaned. And because it is a business, lending institutions can only make a profit if borrowers actually make the payments on the money that they loaned. For them, it is very important to know about an individual’s borrowing as well as debt payment behavior before they can ever decide on handing out the money in the form of a loan or other types of credit.

Creditworthiness of an individual is something that lending institutions really want to know before they ever want to decide of loaning any amount of money. And the best way to do that is by knowing the FICO score and what it represents in terms of an individual’s credit behavior and pattern. And just what is a FICO score? It is simply a way of being able to measure an individual’s creditworthiness without requiring the lending institutions access to an individual’s income history or employment status and, in a way, being able to maintain a person’s privacy in some way.

What is a FICO score and how did it come to be? It was originally developed by the Fair Isaac Company in order to help the credit industry assess individuals applying for credit. The FICO score is calculated taking into consideration certain factors that determine one’s credit behavior. Such factors included in calculating for the FICO score include one’s credit history, current credit owed, the length of the credit history, recent loans applied for as well as the various types of credit each individual has obtained. The FICO score is now widely used by major credit reporting agencies in providing lending institutions with a credit report on individuals applying for a loan, getting a mortgage or trying to get approved for a credit card. Credit card providers and banks also use the FICO score in order to determine credit limits and the setting of interest rates.

Before an individual’s FICO score can be calculated, he or she must at least have one credit account open and active for a minimum of six months. This is the bare minimum of information that is needed for calculating an individual’s FICO score, although it would still be a long way from being considered credit worthy. Most lenders prefer to see an individual having minimum of three or four credit accounts that have been maintained for at least 12 months. This is what banks look for in providing large lines of credit and mortgages to its clients.

What is a FICO score in terms of your credit worthiness? A FICO score is rated at scale from 300 to 850. The accepted median for the FICO score is around 720. FICO scores that are 725 and above are considered good scores while those found below 600 are considered bad. Making sure that one keeps his or her FICO score high would ensure that lenders would approve of credit or loans being applied for.

A Credit Score is designed to measure the risk of default by taking into account various factors in a person’s financial history. The exact formula for credit scoring is still a closely guarded secret, but it largely depends upon the factors such as punctuality of payment in the past, length of credit history, types of credit used (installment, revolving, consumer finance), recent search for credit and/or amount of credit obtained recently etc. These factors are provided by Fair Isaac Corporation. Known as Fico credit scores they are popular and widely used all over America. Lenders look at your credit score before lending to you. There are also other scores such as Next Gen, Vantage Score and CE Score. Credit reporting agencies like Transunion, Equifax and Experian are asked to develop credit reports and scores by the lenders.

Your present income, employment history, education if any, whether you had a student loan and completed repaying it successfully are all recorded in your credit statements and that determines your credit score. Payment of utility bills on time like electricity, telephone bills and credit card bills and insurance premium will enhance your credit score. A good credit score denotes that you are credit worthy and the lender can be sure that you will repay his money on time and without fail. After all everyone is worried about their money.

A good credit score can even find you a house on lease or rent in a decent neighborhood. These three digit numbers act like guardian angel in a persons life. The credit scores range from 300- 900. Anything above 700 is considered to be an excellent score. A 750+ score will fetch you reasonable interest rates with the lender. 450- 700 is fairly a good score and will also fetch you loans and mortgages. The interest may be slightly more than the 750+ category. Anything below 450 is considered to be not credit worthy. Late payments down the score drastically.

If you are a first timer to get a credit card or loan then it is very essential you have a good credit score. This gives the lender an idea about your credibility to repay his money. After all he is not taking any collateral from you. So the risk is his and to ensure that his money is in safe hands, the lender depends on the credit score. Experience has shown that borrowers with higher credit scores are less likely to default on a loan. Its always wise to start with a student loan or pay more than 50% as down payment and take up a small loan to open your credit line. Always try to pay your bills and payments on time and Your credit scoring will gradually improve.