What is a FICO Score and How is it used?

As I am not from the US, I had no idea what FICO score meant beforeresearching it.

FICO stands for Fair Isaac Corporation, acompany based in California. FICO, put simply, is a person'scredit score. A credit score can be used by a potential lenderin making a judgement on whether to grant you credit or not, forexample when you apply for a new credit card or home mortgage.Therefore, if you are in the US, the FICO score is veryimportant to you.

What Does a FICO Score Do?

A FICO score places a value on the types of credit accounts youhold or have held, and your credit history in maintaining thoseaccounts. The FICO score scale ranges from 300 to 850, with themajority of people in the United States in the 600 - 850 range.

This counts for a very significant 35%--the most of the FICOscore factors. As you would expect, paying your bills on time isgets you a good score, while paying them late on a consistentbasis is will mark down your FICO score. If you have had debtsreferred to a collection agency, that is worse still, whiledeclaring bankruptcy is the worst of all.

Another obvious factor that FICO will take into account inarriving at a credit score. This accounts for another 30% ofyour total FICO score. It is not just what you owe already thataffects your FICO score. Also taken into account is the amountof credit available to you. For example, if you have a creditline of $5000, but have so far only used $1000, that will betaken into account.

Your total amount of credit will be totalled, and compared toyour annual income. So, loans such as car loans, mortgages,credit cards, store cards, will all be added together. Those whouse most or all of their available credit will get a lowerrating for this part of the FICO score calculation.

Another important factor that makes up 15% of your FICO creditscore is the length of your credit history. The longer yourcredit history, the better for your FICO score. Additionally,though, a long history with any particular lender will be goodfor your credit score.

The fourth factor taken into consideration is the type of credit mix that you have. For example, do you have only high risk unsecured type credit, or do you also have some solid secured loans such as a home mortgags? Those consumers who have a mix of credit have higher a FICO score. This fourth factor just counts for 10% of the total FICO score.

The last factor in the FICO rating is the amount of new applications that you fill out. If you have recently filled out a lot of credit applications, this will hurt your score because it puts lenders “on alert” that something may be wrong. This part of the score is worth 10%.

Lenders themselves will normally look at employment, income, length at current residence, and marital status, but these do not affect your FICO score.
If you intend to borrow in the future, you do need to pay attention to your FICO score.
If your FICO score is low, this could lead to higher interest rates, extra mortgage insurance when buying a home, and in some cases denial of the loan.

If you plan to take out a major loan, such as a home mortgage, it could be a wise move to get a copy of your credit report 6 months before you plan to apply.
That will give you time to look over your history, to ensure there are no discrepancies.
If you find inaccuracies, contact the Credit Reporting Agency in writing.
They will have 30 days to investigate it, and then correct it if they find your claims are true.
You may also want to ask for a revised credit report; they are required by law to supply you with one if an inaccuracy is found and corrected.

About the author:
Roy Thomsitt is the owner and part author of
http://www.eliminate-credit-card-debt-now.com