Chances are you have heard about a credit score, but what exactly is a FICO score? FICO stands for “Fair Isaac and Co.”, which was a company back in the 80’s that assisted other companies to determine if a customer’s credit was risky or in good standing based upon their credit history. A number was given in regards to the history ranging between 300 and 850 and the three primary credit bureaus adopted this form of reporting: TransUnion, Equifax, and Experian.
Credit Report vs. Credit Score
Credit scores and credit reports are not the same thing. A credit report is a detailed account of the credit history you’ve obtained up until the present. In this report you might find things such as:
Your payment history
Number of credit accounts
Utilization of credit
When you look at your actual credit report, you will not find your FICO score. This is just a simple report of your credit history for the past seven to ten years. Most reports only go back seven years, but if you have a bankruptcy in the past, that can show for ten years.
Your FICO score will be derived from your credit history. Actually, what happens is that the three major credit bureaus will take a look at your credit report and calculate your FICO score based on such. Did you know you can acquire one free credit report each year? It is in your best interest to do so and make sure everything is correct.
How is a credit score calculated?
Not everything in your credit report is as important as you think. Some aspects of your history are more important than others. This is one reason it is a good idea to educate yourself on the matter. Here is a breakdown of how your FICO score is calculated:
Payment history- 35%
Amount of money owed – 30%
Length of credit history – 15%
Type of credit – 10%
New credit – 10%
It is quite important to have a good payment history and keep the money that you owe as low as possible, so that your FICO score will be higher. After all, these two aspects make up about 65% of your FICO score. If you want to raise your FICO score, you really want to be sure to make every payment on time and decrease the amount of your debt as much as possible.
Why is your FICO score important?
If you ever want to borrow money for things like a house, car, etc., you want to be sure you have the highest FICO score possible. If your FICO score is low, you will have a difficult time finding a lender to loan you any money. Additionally, there are some employers that check credit scores before hiring new employees and give those who have higher FICO scores more consideration.
Your FICO score will also determine the amount of interest you will be charged on the amount of the loan. If your score is high, your interest rate will be lower than someone’s whose score is low. Low FICO scores are seen as more of a risk.
How you can improve your credit score
Good news is that you can improve your credit score if you make your payments on time and reduce your debt as much as possible. If you have trouble remembering when your payments are due, keep track of all payments on your calendar and be sure to pay them on time. You can also sign up for automatic payments for bills in many cases. The key is to become fully responsible for your finances and do whatever it takes to get your credit score where it needs to go. You can do it!