How Do Companies Use My FICO Score?

Determining the credit worthiness and potential risk of a credit applicant is the major function of a credit score. This little three-digit number carries a lot of weight. Employers use the score to determine the financial risk of job applicants while utility companies use the score to set deposit amounts. Although in today's tough economic climate a FICO score is subject to many setbacks, companies still use the score as an indicator of future risk.

The FICO Score

Each of the national credit reporting agencies (TransUnion, Experian and Equifax) tracks the credit habits of consumers. They compile a grading or score for a consumer using criteria such as payment history and debt ratio. These scores are combined into a FICO score by Fair Isaac Corporation. Scores can range from 300 to 800 points. A low FICO score indicates a higher perceived risk of the individual, and sometimes leads to rejected credit applications or higher interest rates. The FICO score has five parts: Payment History, Account Balances, Length of Credit History, New Credit and Other Factors (mix of credit types, for example). The parts are weighted individually, with payment history carrying the most weight at 35 percent.

Credit Reporting Agencies

Credit reporting agencies gather information from credit card companies, banks and lenders. Payment history, timing of payments, account balances and closing of accounts are types of information that get reported. Although the agencies are not affiliated with the government, they are regulated by the Fair Credit Reporting Act, so factors such as age and race are not used or reported. Each agency calculates credit scores differently and they do not share information.

How Companies Use Credit

When applying for a home mortgage, car loan, credit card or any other long-term financial commitment, most consumers will face a credit check. A credit check helps a company make a decision about an applicant's payment habits. If a credit report shows a history of late payments, multiple open accounts or maxed out credit cards, a company may think twice about extending credit. If credit is extended to an applicant with credit problems, the interest rate is usually much higher than the market average.

Employers typically run a credit check on applicants applying for jobs in the financial sector. Applicants with low FICO scores are deemed a greater threat to security, as money issues may prove to be a temptation for theft.

Mortgage lenders typically review the FICO score when approving a loan; however, some companies only look at one agency score when reviewing a credit application.

Get Your Score

If a consumer has a low credit score, the first step in raising it is to obtain a copy of the credit report. Consumers are allowed one free credit report per year from each of the reporting agencies. Consumers can call 1-877-322-8228 or visit annualcreditreport.com to order a copy of their credit reports. It is important to review and report any errors to the credit bureaus immediately.

Rebuilding Credit

Paying off high interest credit cards and making on-time payments raises credit scores. Paying down balances is important because having multiple cards that are at the limit lowers the FICO score. Applying for new credit cards or loans causes a small dip in the score, so it is best to avoid this during the rebuilding process. There are no magic bullets to raise a credit score; the only thing that works is time and wise money management.