The Fair Isaac Company uses a numeric scoring method -- called an FICO score -- to determine your creditworthiness. FICO scores are assigned on a scale of 300 to 850 -- the higher your score the more credit advantages you will reap. Your FICO score has a direct bearing on the type of credit you will be able to get and the cost of that credit.
Types of Credit
Your FICO score will affect any type of credit you attempt to receive. Creditors who offer secured forms of credit -- small lines of credit which require a deposit -- will be more likely than other creditors to extend credit to someone who has a lower score. Auto loans could be difficult to receive for those will lower scores, depending on the age and value of the vehicle. A person with a lower FICO score will find it difficult -- if not impossible -- to secure a mortgage lender without at least a substantial down payment. By the same reasoning, those with good or excellent credit scores will be more likely to receive offers of credit from anywhere they seek it -- as well as other sources. Bottom line -- the better your FICO score, the more attractive offers of credit you will receive.
Interest Rates
The less of a financial risk you are rated by your FICO score, the better the interest rates will be attached to any credit you receive. Lower interest means less overall cost to you when paying back money you owe creditors. The greater the financial risk your FICO score poses, the higher the interest rates will be for you. That means you will end up paying more for a loan than someone with a higher score. Bottom line -- your FICO score determines how much interest a lender will charge you for loaning you money or giving you credit.
Explanation of FICO Ranges
FICO scores range from a low of 300 to an ultimate score of 850. Major lenders don't lend to individuals with a score under 500 because these consumers are considered "sub lenders", according to Suze Orman, financial guru. Starting at the bottom, the ranges are 500-579, 580-619, 620-659, 660-699, 700-759 and 760-850. Those with scores in the highest range -- 760-850 -- will receive the best credit offers, while lenders consider those with scores dipping below 600 greater financial risks.
Helpful Advice
If your FICO is not where you want it to be, there are some things you can do to improve it. Be aware that there isn't a quick fix, but you can take steps to gradually improve your score and achieve the financial goals you have in mind. Ways to improve your score include paying off excess credit, paying bills on time and keeping credit to a minimum -- one or two accounts. If you don't have any credit, you can open an account or two and make timely payments.
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