The FICO score is an important measurement used by lenders in determining whether a person is a good credit risk. Credit mismanagement over time causes a person to develop a low FICO score and results in less available credit and higher interest rates.
Identification
The FICO score is a mathematical calculation that serves to predict whether a person is a good financial risk. According to myFICO.com, the FICO score is calculated by looking at the following five categories of a person's credit report: payment history, amounts owed, length of credit history, new credit and types of credit used.
Evaluation
FICO scores range from 300 to 850. The median FICO score is 725 while a good FICO score is considered to be above 760. A low FICO score is considered to be any score below 620.
Cause
The FICO score takes into account credit behavior over time. There are several factors that could cause a person to have a low FICO score, including not paying debt on time or in full, an unfavorable debt-to-credit ratio and having several new credit accounts at the same time.
Significance
Lenders use the FICO score to determine whether or not a person is granted credit and at what interest rate they will pay for it. It is commonly used to qualify applicants for credit cards, auto loans and mortgages. A low FICO score increases the chances that a person will not be approved for credit or will pay a higher interest rate on new credit.
Opportunities
The best way to improve a low FICO score is to manage credit responsibly over time, according to Bankrate.com. Taking actions such as paying down credit cards, using older credit cards and disputing negative information on a credit report may also improve a person's credit score.
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