About FICO

The FICO score has become a large part of our daily lives. FICO scores are checked when you apply for a mortgage, a car loan, a credit card, a rental apartment and in some cases even a prospective employer will check your credit score before deciding on hiring. What makes the FICO a challenging part of our lives is calculating how they are scored. An additional challenge is that all three of the major credit bureaus, Experian, Transunion, and Equifax each score their own FICO's, meaning everyone has three FICO scores.

History

While credit reporting has been around for over 100 years, credit scoring is a relatively new system. In the beginning, credit reporting was a simple system in which town merchants formed an alliance in an effort to determine who was credit worthy. As time progressed, and credit reporting became a business, it began to be seen that something needed changing. Originally only negative financial information was included on these reports, as well as personal information such as cleanliness and sexual orientation. Under the Fair Credit Reporting Act passed in 1971, consumers gained the right to view and correct their credit reports, and positive information was added to reports. In 1989, the FICO score was developed by the Fair Isaac Corporation, a financial group known to advise large banks. The score was developed in an effort to measure the risk of a potential borrower. It is a three digit number, between 300 and 850, with 300 being extremely risky and 850 being a perfect borrower.

Significance

Your credit score is very significant when you need to apply for a loan, apartment or job. Since you will be judged by this number, it is critical that you have it in the best shape possible. Whether you agree with the scoring system or not, it is still the score that lenders, employers and landlords will be using to determine whether or not you get the loan, apartment or job. As this can determine your choice of career and place you live, your FICO credit score is very significant to your lifestyle. A FICO score is also significant to those checking your credit score as this will be how they form their judgment of you. It is important to note that nobody is allowed to check your credit report and FICO score without your permission.

Effects

The effect your FICO score has on your lifestyle can be drastic. If you have a low FICO, from 650 and lower, you may be able to still obtain a loan, but a much higher interest rate. A higher interest rate on a larger loan, such as a mortgage, can mean hundreds more dollars a month out of your pocket, strictly for interest. In some cases, for a mortgage, you may be required to put down a larger down payment in order to qualify for a loan. If you don't have the money to put down, this can be the difference between obtaining that mortgage and being declined for it. Many landlords have also now begun checking credit, which can make the difference between living where you want to live and where you have to live. Most recently, employers have also begun checking credit reports and scores in an effort to determine the value of an employee. They use this score to determine how disciplined you are. You will feel the effects of a low FICO score if you lose an important job because of it. In all, the FICO score can affect many aspects of your daily life.

Prevention/Solution

The best way to keep a high FICO score, is to do what the credit bureaus are scoring you on. Paying your bills on time is the most significant way to keep your score up. If you must pay a bill late, pay it before it reaches the 30-day late mark, as this is when most creditors report to the credit bureau a late payment. Other ways to keep a healthy credit score is to limit the number of times you apply for credit, keep your credit card balances at or below 1/3 of the available limit, and never let any bills go to collections. Once you have a collection on your credit report it is very difficult to remove it, even once it is paid off. Keep track of your bills and when they are due to prevent any late payments. Also, be sure to not stretch yourself by borrowing more than you can pay back. If you find yourself in too much debt, take a second job or cut back other expenses in order to pay down your debt.

Expert Insight

The FICO score is sure to be around for a while, so whether you agree with it or not, you must learn to work with it. By law, you can check your FICO score yourself, though you will need to pay a small fee each time you do so. You can check your credit report for free once a year from each bureau, or after you have been denied credit for any reason. Check your score and report often and immediately fix any errors that should arise. When you apply for a loan, job or apartment, you should know exactly what they will find when they pull your information. Credit monitoring can be done for a small fee as well, and is often worth it. Anytime there is a change on your report you are notified right away. This helps prevent fraud and identity theft. This is also a great way to keep track of your credit reports if you are working on repairing your credit. Is it worth it to pay a professional company to repair your credit for oyu? Not usually, as you can do all the credit repair actions yourself. However, if you find a reputable company and you lack the time to take care of it on your own, it can be a good alternative. The bottom line, if your finances are important to you, it is crucial to keep your FICO score in top shape.