The FICO score, which is a product of the Fair, Isaac, & Co., translates a person’s entire credit report into a three-digit number score. This score determines whether or not you are qualified to get a loan; and while many people are still not familiar with this, it is something that everyone should know about. This article will talk about how the credit score is computed and if there is a way to improve it.
In North America, all lending activities are recorded by three major companies – Equifax, Experian and Trans Union. This information then goes into making up the FICO score which is based upon a scale of between 300 and 850. This score is used by other companies in assessing your ability to pay back credit. Such companies may range from insurance to credit card companies and even now a days – potential employers.
The credit score is based on several factors:
* A person’s payment history makes up about one-third of the score. Past transactions and loans made are evaluated and the person’s ability to pay is studied. A person who often makes late payments will be considered a bad candidate, more so if this person has a history being unable to pay. On the other hand, people who have successfully paid their previous loans will be given good scores.
* Existing debts are also considered, and this make up another one-third of the credit score. The ratio of current debt to existing available credit is considered and this will reflect on the person’s score. Credit cards that have been maxed out are often very bad and it will definitely give a bad reflection of a person’s paying capacity.
* Length of the credit history, types of overall credit, and recent credit applications make up the final one-third of a person’s credit score. Of the three, the length of a person’s credit history is important because it determines the person’s ability to maintain a credit card. People who have had the credit card for very long will definitely be better clients than one who have just been using their credits for a few months. Recent credit applications will also be investigated; and people who have several pending applications will seem as though they are desperate for money and so might be a risk. Finally, the type of credit that people make is observed; and a person with a credit report that consists purely of credit card transactions will be a big risk.
All these points are taken into account and will add up to 100% of the consumer’s FICO score. Plan ahead and try not to make any rash financial decisions and this way your own FICO score will be very healthy.
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