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Understanding the FICO Score

FICO stands for Fair Isaac Corporation, the company behind the formula that is responsible for the three-digit numerical known as the FICO score. With this score, the world of business is capable of deciding whether or not an individual is a high-end or low-end risk for the loan they are applying for.

The score is a combination of five categories stemming from an individual’s spending and bill-paying habits. More or less, the FICO score is responsible for deciding what amount of interest rates will apply to the consumer’s overall bill if they choose to take out a loan.

This makes that number the most important piece of information an individual will ever know about their financial history. Knowing how to improve the FICO score, and what it can take to lower the numbers, allows a consumer to be completely in charge of their financial life.

Whenever a consumer makes a purchase or applies for an application, such as renting out a duplex or signing a contract for a cell phone, the FICO score helps businesses determine whether or not they can trust their customer to keep up with the incoming bills.

To ease the process for both sides, the score is broken down into five categories of an individual’s financial history in order for both the lender and the receiver can rate the score.

Ten percent of the score is determined by the number of credit cards and current loans the consumer has applied for overall. This way, it can be a judge of whether or not those cards are being used responsibly as a whole, and if the consumer can keep up with multiple commitments.

New accounts and applications for credit cards and loans make up another ten percent of the FICO score. A wise tip that is commonly passed to consumers looking to improve their FICO score, is to avoid creating multiple accounts and applying for multiple cards in a short time frame.

There should be at the earliest a three-month gap between the attempted applications for accounts and cards, otherwise, a lender will consider the individual a possible risk due to the interest in increasing the debt ceiling.

Fifteen percent of the FICO score is determined by the length of credit history a consumer has available. High school graduates struggle with this particular category as many lack the requirements to receive a card early enough to begin building credit.

This makes it difficult for them to apply for loans to aid in paying for their college tuition. Another tip that commonly finds its way among the masses is the belief that cutting up credit cards is a viable first step for those looking to begin or fix their credit problems.

However, cutting up the cards may not be the best solution as many credit card companies stop submitting data to an individual’s credit report when the card has not to be used after a certain time period. As a result, what could have been used to manage a good, clean credit history is thrown away.

On the larger end of the spectrum, thirty percent of the score relies on the total balance of a consumer’s loans and cards when compared to the total credit limit available. This resembles the credit-to-debt ratio that an individual would use to manage one credit card. In this case, the score is measuring the total credit limit in comparison to the total amount of loans an individual owns.

Finally, the largest percentage of a consumer’s FICO score relies on the individual’s ability to pay bills on time.

This financial record counts for thirty-five percent of the overall score, making it a big deal to a lender. Paying bills a week in advance is smartest and considered the quickest way to raise up the FICO score. With these five parts,  an individual can learn what to watch specifically in order to make an impact on their credit reports and their FICO score.

As stated earlier, the FICO score is the report card of a consumer’s life, as it measures in three digits how financially responsible an individual is. There are six ranges that a consumer’s FICO score can land in, which in turn will determine the interest rate they will receive on any loans, leases, or applications in the future.

The five ranges are as follows, from best to worst: 760-850, 700-759, 660-699, 620-659, 580-619 and 500-579. A key thing to remember with the FICO range is that the numbers within any single range qualify for the same interest rate.

Someone who has a FICO score of 620 can receive the same interest rate as someone who has a score of 659. The difference in interest rates between each range is large enough to encourage even the most skeptical consumers that action must be taken.

This makes obtaining a loan easier once a range is entered, however, it is wise advice to continue building up the score. A FICO Score is similar to a muscle, in that it is strengthened through a strong financial plan, and weakened when that plan is skipped over, or if there is a mistake made on the score that takes a while to be fixed.

The FICO Score is the final number on a financial report card, also known as a credit report. Credit reports are given out by the three major credit bureaus, TransUnion, Equifax, and Experian.

Once a year, consumers are entitled to a free credit report, one from every bureau. Each credit bureau will commonly never have the same FICO score as its result, meaning that the consumer needs to go through each report with a completely thorough search in order to find any errors located in the financial history.

According to a study performed by the U.S. Public Interest Research Group, nearly 80% of all Americans have located some error, ranging from mild to severe in their credit history when completing a thorough search. If a mistake is located on any of the three credit reports, the best course of action that can be taken is starting the process to fix it.

Whether it’s a case of identity theft or a minor typo on the report that has caused miscalculations to occur, a consumer will want to take care of the problems, otherwise, they may be a detriment to a future loan that might be required on the individual’s part.

When applying for a loan or filling out applications for a lease, the lenders will get in contact with one of the three bureaus to obtain a consumer’s credit score, to wager whether or not the individual is a low-risk investment.

To jump ahead of the game, it’s wise for an individual to get in touch with his or her lender for the most recent application filled out, and asking which bureau they will be notified to check the score. This gives consumers an opportunity to make the best of each of the credit reports.

To take full control of a consumer’s financial history, the best option is to purchase a complete credit report from each of the three credit bureaus in order to receive one FICO score each, following through on the processes required to fix any mistakes the consumer may find on their individual reports.

Keeping a keen eye towards the FICO score helps give an individual complete control of their financial history. Understanding how the FICO score is affected by the consumer’s spending and bill-paying habits is key to aiding the individual in having a positive experience with future requests and applications.

Comprehending how the FICO ranges affect the state of interest rates play a big part in developing a consumer’s financial IQ and provide in the end, the ability to control their financial habits and outcome.