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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