Unless you are looking to buy a car or house, you probably don’t even know what a FICO score it, never mind what yours is. For those of us looking to buy a home, however, we are only too aware what it is.
What exactly is a FICO score? The acronym is for Fair Isaac and Company. This company uses a proprietary method to calculate a number, or “score” for any consumer to determine if he will be an acceptable risk for a lender.
People may talk about this as their credit score, their credit rating or just their credit. The concept is the same, some measure of whether or not a borrower is going to be a good credit risk.
The manner that they find this out is by retaining companies that compile as much financial data about consumers that they can. TransUnion, Experian and Equifax are the main companies that do this.
Since there are small differences in the means these companies come up with their scores, lenders take all three scores and do an average to decide a customer’s credit worthiness.
The three big credit agencies compile the financial history of borrowers. If a consumer is late in paying bills, or doesn’t pay a debt at all, this will be reported by the store, credit card company, utility company or landlord to the main credit rating agencies. The main credit agencies gather this information and use it to calculate a score.
A higher number will result in a higher credit score, which will mean an increased chance of getting a loan. FICO scores are given a range from 300 to 850.
If you have had any bad experiences with one of your lenders, whether it is your utility company, a department store or a credit card company, this fact is recorded. The top credit agencies keep all of this data in their databases.
For illustration purposes, let’s suppose that every consumer starts out with the best score of 850. Any late payment, credit defaults or high credit load will cause this number to be reduced. The more reductions because of these harmful transactions with the companies, the worse your score will be. Enough of these types of situations, and your score may be brought down so low, under 400, for example, that no bank would consider you a good risk.
The idea behind this is that you will continue to pay late and be overburdened with debt, and the current lender will suffer.
If you have only a few problems, your score will not be greatly affected, and you may still get a loan. Too many, however, and the new lender is going to see you as a customer who is consistently irresponsible in his credit obligations and will not want to take such a risk.
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