FICO stands for Fair Isaac Corporation. The Fair Isaac Corporation is the company that developed the credit scoring formula most widely used by lenders, called the FICO score. The FICO score looks at your past credit history to produce a score between 300 and 850, with higher scores meaning that you are less likely to default on loans in the future.
Factors
The FICO scoring model breaks your financial history into five, unequally weighted categories. The first 35 percent of your score depends on how you have paid your bills in the past. The next 30 percent depends on how much you owe and how much of your available credit that you are using. Another 15 percent of your credit score is based on how long you have has credit. The last 20 percent is split equally between how many different types of credit you have used and how much credit you have recently applied for.
Types
Your credit score looks at several types of information about your credit history. Accounts that are included are trade lines, credit inquiries and public records. Trade lines include credit cards, mortgages and other loans that you may have taken out. Credit inquiries are created whenever your credit score is pulled by a lender who is considering offering you credit. Public records include bankruptcies, foreclosures, suits, wage attachments, liens and judgments.
Data Collection
Financial institutions report data about your financial past to credit bureaus who then use the information to establish a credit file and calculate your FICO score. The three major credit bureaus in the United States are TransUnion, Equifax and Experian. These credit bureaus then sell the credit scores to lenders who are considering offering you credit.
Time Frame
In general, all items on your credit report affect your credit score for seven years. However, there are several exceptions. Credit inquiries only remain on your credit report for two years. Chapter 7 bankruptcies remain on your report for 10 years. Tax liens, if left unpaid, can remain indefinitely. The older a record is on your report, the less influence it has on your score.
Significance
Your credit score is a major part of a bank's decision to offer you credit. If your credit score is lower than 620, according to Bankrate, you will have to pay a much higher interest rate on your loan. However, if you are in the top tier of borrowers, usually having a score of 760 or higher, you will usually qualify for the best interest rates, which can save you money on loans.
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