FICO score is the 3-digit number mentioned in your credit history. It is crucial that you understand how it works, especially if you want to make large purchases.
FICO is the acronym for the Fair Isaac and Company, which started credit scoring system in the 1950s. They calculated risk by considering 30 various factors. The three major credit bureaus, Trans Union, Experian and Equifax consider FICO scores while preparing credit reports.
This manner of scoring is helpful in determining the chances of you defaulting on the loan. The credit card, mortgage industry and installment loan industry have been following this process for various years. A credit score simplifies the task of the lender by segregating the loan applicants quite quickly. For people with a high credit score, their applications get a cursory glance but high rating. On the other hand, a low credit score results in rapid review and equally rapid rejection.
Credit scores lie in the range of 300-900, with an average score lying between 500-800. A score in the 500s is considered very low. This tells the lender that the borrower is very risky with high chances of default. A score in the 600s is considered intermediate. Here the lender will scrutinize your payment history. In all likelihood, you will have to provide written explanations for your negative credit before you can get new credit. Some lenders will refuse credit to people whose score lies below 640. A FICO score exceeding 680 is high, which means the risk for the lender is low and translates into lower costs for you.
Every reporting agency gives maximum of 4 reason codes when they post FICO scores. This provides explanation for the low score on the credit report. The reason codes have a major impact on the credit score. Once you take care of these issues, your FICO score can rise up dramatically.
The following are major factors that affect your FICO score:
Number of accounts opened within a year.
Zero current credit card balance.
Small credit history.
Delinquencies
Credit card balances at their highest.
Tax liens, judgments or bankruptcies.
Plenty of credit inquiries.
Insufficient revolving credit accounts.
Keep in mind FICO scores are simply guidelines. There are other factors besides FICO score can have an effect on underwriting decisions. In the cases listed below, the lender can be more relaxed:
Big down payment.
Minimum debt-to-income ratio.
Excellent track record of saving money.
Old paid loan with present lender.
Access to home equity or collateral.
Tags: Credit Industry, Fico