Lenders will often charge you a higher interest rate or deny you credit for a loan or credit card based mainly on a low FICO score. When you apply for larger, longer-term loans such as a mortgage, other credit reporting factors may affect your interest rate and loan approval.
About FICO Scores
The three major credit bureaus in the U.S., Experian, TransUnion and Equifax use credit-scoring methods developed by the Fair Isaac Corporation or FICO. These methods may vary slightly from one credit bureau to the next. This often causes your credit score to differ slightly. The credit factors that affect the majority of your FICO credit score are payment history---35 percent, amount of outstanding debt---30 percent and age of credit accounts---15 percent.
Public Records
If a creditor sues you for an unpaid balance and the judge finds in favor of the creditor, this information appears on your credit report in the public records section. Other information that appears in this section includes federal and state tax liens, foreclosures and bankruptcy filings. Anything reporting in the public records of your credit report lowers your FICO score. Credit reporting agencies do not reveal exactly how much it lowers your score, only that the damage is significant. If the judgment has a zero balance, it may not completely prevent you from getting a loan, but it will increase the interest rate you pay.
No Credit History
If you have no credit history, you are in a situation where you may have a low score, but not because of bad credit. Lenders assess credit risk based on credit history. This assessment is how lenders decide whether to approve you for a loan and what interest rate to charge. Lenders having nothing on which to base their credit risk assessment when you don't have a credit history. As a result, they typically charge a higher interest rate.
Improving Your Score
The only way to get the best interest rate on any line of credit is to improve your FICO credit score. To do so, work to pay down your current outstanding balances on your credit cards and loans and try to make all your payments on time. If you have collections accounts that still have outstanding balances, you may want to contact the creditor to make payment arrangements to pay those balances off. Once your FICO score improves, lenders will charge you a lower interest rate on new lines of credit.
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