The FICO score is used to assess the credit worthiness of individuals. The Fair Issac Corporation initiated this credit-scoring method. An individual's FICO score is a number between 300 and 850. The higher the score, the more financially stable the individual is deemed to be. Individuals with higher scores are able to obtain loans at lower rates of interest because based on their history, they are more likely to repay the loans on time.
Factors Influencing Credit Score
The FICO credit score is computed by taking into account several factors. The most important factor is how prompt the person is in making monthly payments. When there are no defaults on mortgage repayments, credit card payments and utility bill payments, the person's credit score remains high. The FICO score also takes into account the amount of debt the person holds. The types of credit owed by the individual are also analyzed. It is always beneficial for the person to have different types of credit such as mortgage payments, credit card and car loan repayments. The person's credit history is also analyzed. Individuals having longer credit histories are considered to be more financially stable.
Credit Reporting Agencies
In the United States, there are three main credit reporting agencies: Equifax, Experian and Trans Union (See Resources). Each agency computes the FICO score differently by giving different weight to different factors and produces its own score. You can get a copy of your credit report whenever you want by contacting the credit reporting agencies, although you will likely have to pay for it. On the other hand, you can receive a free copy from each of the agencies reports annually by going to annualcreditreport.com.
Credit Score
When an individual wants to obtain loans in the market, the lender reviews her FICO credit score before deciding on whether or not to sanction the loan. A FICO score of below 620 is considered low and highly risky. Individuals with this score or less are considered to be high risk to default on their loans or to pay late
The lender evaluates the risk involved and accordingly fixes the rate of interest on the loan, with those with low credit scores paying higher interest rates.
Credit Score Fluctuations
The FICO credit score keeps rapidly changing. For example, one late credit card payment could lower the score by 50 points or more. If the person defaults further, the score is bound to decline further. On the other hand, If he starts making prompt monthly repayments and pays down debt, his score starts improving.
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