What’s All This Talk About FICO Ratings?
If you have never been in the market for a car or a home, you probably don't realize what a FICO score is. Anyone who has been looking for a loan will be aware of the FICO rating.
What is this thing called FICO? The letters themselves are the initials of the company "Fair Isaac and Company". This company has a proprietary method to calculate a number, or "score" for any consumer to determine if he will be a good risk for a lender.
Many people refer to the FICO score as your credit score, the credit rating, or just plain your credit. This rating or score is a figure that indicates to a lender that a borrower or will not be a good credit risk.
Therefore, lenders pay for the service that gives this information, based on the financial data of a borrower. As a rule, lenders employ the services of the three main credit rating companies, Experian, TransUnion and Equfax.
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 determine a customer's credit worthiness.
The information that is gathered is you, the consumer's history of financial dealings. Each time you open a credit card account, a store credit, maintain an account with an electric company or a telephone company, take out a car loan or a mortgage, and in some cases, rent an apartment or home, the total of your transactions with each company is recorded. The main credit agencies gather this information and use it to calculate a score.
Of course, a higher score will mean that you have a better credit standing and you will be a good candidate to get a loan. FICO scores can range from 300 to 850.
Each bad transaction with any of your financial partners such as a credit card company, department store, bank, etc. will be recorded. The credit agencies gather this information from all of these companies and create a file on each consumer.
Let us say that you began with a perfect score of 850. High credit card balances and lousy bill payment experiences will show up in this report. A lot of late paid debtor consistently maintaining high balances on your credit cards will result in a lower score. Enough of these kinds of situations, and your score may be brought down so low, under 400, for example, that no lender 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 new lender will suffer.
If you have very few problems, your score will not be greatly affected, and you may still obtain a loan. Too many, however, and this lender is going to see you as a customer who is consistently irresponsible in his credit obligations and is not going to be willing to take such a risk.
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