FICO Scores Explained

FICO Scores Are An Essential Aspect of Our Lives

FICO scores are an increasingly important factor to life nowadays. The effect it has on one's economic situation is greater than it ever has been. In spite of this very few folks actually have an understanding of what makes up these scores. Although there are volumes that could be written about on this subject, there are a few basic principals that, if understood, will give anyone a considerable knowledge base with which they can conduct their economic situation.

Five Components Which Make Up the FICO Score

• Payment history, this makes up 35% of the score
• Amount owed, this makes up 30% of the score
• Length of credit history, this makes up 15% of the score
• New Credit, this makes up 10% of the score
• And, Types of credit used, which also makes up 10% of the score
  

What Does Not Factor Into Your Score

Private information having nothing to do with actual payment history such as race, religion, sex, marital status, age, salary, location of primary residence, child and/or family support or rental payments.

You Actually Have Three FICO Scores

There are actually three FICO scores, one from each of the credit reporting bureaus: Experian, Equifax and Trans Union. These scores will differ, although not greatly, depending on what information each of the bureaus have on file on you.

How FICO Scores Affect Your Finances

Lenders rely on your FICO scores in deciding whether or not to offer credit, the amount to lend, the rate of interest to charge, and the terms of repayment. All told a high FICO score will translate into considerable savings depending on the loan and terms.

Example of How a Good FICO Score Can Save You Money

Using typical rates a consumer with a FICO score of 760 or more would be approved for a loan with an interest rate of 6.36% and a monthly payment of $1,345 on a $200,000 fixed rate loan. While someone with a score of 640 or below would have an interest rate of 7.95% making their monthly payment $1,577 on that same $200,000 loan. That's a difference of $232 per month which over the period of a year calculates to $2,784.

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Credit Myths Debunked

There are many erroneous assumptions that that populate peoples belief systems involving credit issues. This article at Credit Repair 4 Dummies takes a look at some of them and how maintaining these beliefs can negatively impact your credit. From the over estimating how important a factor one's FICO score is to the belief that merely applying for credit will automatically impact someone's credit score in an adverse way this article set the record straight and provides valuable information with which a much more solid foundation can be built upon which effective credit repair can be started.

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Credit Rebuilding: A First Step

Credit Rebuilding

The importance of staying out of trouble as a credit-rebuilding tool cannot be stressed enough. Even doing nothing can help a bad credit report, but repeating poor credit habits can make things much worse. Creditors can be somewhat understanding of a bad credit incident, if corrected. This can be particularly true when the bad credit originated with problems outside of the debtors control such as emergency medical bills. Repeated bad credit behavior indicates a problem with deeper roots and looks to be a stronger indication that future credit worthiness looks shaky. If you want your credit to improve, be perfect with your new credit, as well as old credit where accounts remain open.

To accelerate the rebuilding process try to have at least three active credit lines open, and be perfect with them. Car loans or mortgages count if you still make payments, as well as old credit cards if they can still be used. If you need to obtain new credit store cards or gas cards can be easier to obtain than major credit cards. If even those fall beyond reach any one can be accepted for secured credit cards. Make sure when taking a new credit for rebuilding purposes that the creditor reports to the major credit agencies. Not all creditors submit information to the credit bureaus, and almost no debit card or check card issuers do, even ones with a MasterCard or Visa logo. Use the credit you have obtained and make your payments on time (did I mention I can’t stress this enough). On time means never being 30 days late. At fifteen days you may pay a late fee, but late items must hit 30 days overdue before they will be reported. Using credit does not mean abusing it, you need not run the card up to its limit. On the other hand, leaving the card in your wallet will not help rebuild your credit as much as positive usage. A service I have seen claims they will report your rent payments to the credit reporting agencies. Potentially this could accelarate credit score rebuilding.