Most of us are aware that we have a credit report which is maintained by a number of major credit bureau and a very important part of your credit report is your FICO score. So what is your FICO score and how does it influence your borrowing decisions?
FICO is an acronym formed from the initial letters of the Fair Isaac Corporation who worked out this method of credit scoring and it is a number which is usually between 350 and 850 that ranks credit worthiness according to a proprietary algorithm devised by the company, with 350 being the poorest score and 850 being the best.
Though the details of the algorithms are a tightly held trade secret, over the decades many people have reverse engineered several of the more important factors. For example, any late payments will lower your score and the greater the number of late payments you have and the later they are the more heavily the score will be lowered. Another element is the total amount of debt which you carry each month. A not quite so important factor is the number of credit cards you hold and the number of credit checks performed out on your account.
Any score under about 620 is considered marginal and a score less than 580 is poor. A score of 720 and above is considered to be very good to excellent. A score which falls between 620 and 720 represents a kind of gray area in which factors other than your simply your FICO score will play a more significant part in any loan decisions.
Banks, mortgage companies, credit card companies and others will look at your FICO score as a very important factor in deciding whether to grant you a loan. Lenders will also take your score into account when setting the interest rate to charge you. Other things being equal the greater your score the better the interest rate you will have to pay.
Frequently of course all other things are not equal and general interest rates, the current demand for loans, the overall economy and a host of other factors have a substantial influence on whether lenders will lend and at what rate they will lend.
Another extremely important factor in the equation nowadays is the use of computers which has altered the financial industry significantly over the past 20 years and provided consumers with far more direct access to services and products through the Internet.
Even with all these changes the FICO score remains a main tool for almost all lenders and, although it may not be the determining factor in the final decision, it certainly influences the 'first cut' when presented with a pile of loan applications to either approve or disapprove.
Happily for those who have financially slipped there are alternatives and even if your FICO score is low you nevertheless have several options. The first thing to do is to set into motion a plan to raise your credit score.
As you work to clear your outstanding overdue debts by paying them off or negotiating with the creditor your credit score will gradually increase. And remember that the age of those 30 and 60 day past due and late payments is an element in calculating your credit score.
While you are raising your credit score you can also look around for other lenders who are prepared to take a higher risk by lending you money. The difficulty of course is that those loans almost always carry a higher interest rate. If you are able to your best approach is to see if you can go without borrowing for as long as possible while you work to raise your credit score.
Author Resource:-
TheDebtAssistanceCenter.com provides information on a range of topics including personal bankruptcy and exists to provide debt assistance for borrowers.
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