FICO (Fair Isaac Corporation) credit scores are determined on the basis of a variety of factors. The prime objective of the FICO scoring system is to permit lenders to quickly assess the risk associated with lending to a prospective borrower. Thus, scores range on the basis of one's ability to manage personal finances, or even on the basis of inaccurate or misreported data.
How Scores are Analyzed
Three different credit reporting agencies report FICO credit scores to lenders when a prospective borrower attempts to apply for a loan: TransUnion, Equifax an Experian. Although these three agencies generally deal with similar data, sometimes information may be reported to one agency that is not shared with the other two agencies. Thus, FICO scores differ between them. For the sake of efficiency, the data these companies receive is processed by computers that use complex algorithms. Scores in the range of 700 or above are considered good credit risks, while 620 and below are poor risks.
Components of a FICO Score
A person's credit score is determined on the basis of five primary factors. A person's payment history affects 35 percent of his credit score. Making timely payments and avoiding outstanding balances will positively affect a FICO score. An additional 30 percent of every score relates to amount owed on open lines of credit. And 15 percent of the score relates to a person's length of credit history. Finally, the types of credit you have in use and any new credit you have applied for each separately account for 10 percent of your credit score.
Considerations
Your FICO score will plunge considerably if you habitually miss payments, or are frequently late to pay your bills. A record of financial irresponsibility is the last thing a lender wants to see in your FICO score. Even if you completely pay off a credit card or close a credit account, your history of credit management will not be erased.
Misconceptons
Just because you've handled your investments wisely in the past doesn't mean that a lender will want to bet the bank on you. For example, if you are a relatively new borrower who has recently paid off a signature loan for riding lawn mower, a lender is unlikely to approve you for a $400,000 home loan until you've augmented your credit history by applying for and repaying other loans of less considerable value. In the same way, if you are trying to apply for a car loan in the midst of a beleaguered national economy, the odds of receiving the loan will probably be less in your favor than in more robust economic times.
Benefits
While credit scores are perceived to be invasive or arbitrary by many borrowers, they are actually designed to benefit borrowers and lenders alike. Obviously, lenders prize credit scores since the information they provide can safeguard them from taking on bad credit risks. Additionally, credit reporting agencies are able to save lenders time by using computer algorithms to process hefty amounts of data. Ultimately, this benefits a borrower as well, by allowing him to receive a speedy response on his loan or credit applications.
0 comments:
Post a Comment