You all have heard of FICO. FICO stands for Fair Isaacs Corporation. In 1989, the Fair Isaacs Corporation and Equifax developed the score. To calculate your score, the system awards points for each factor that can help predict the likelihood of a person repaying debts on time.
These points are totaled to generate your credit score. The score predicts a person’s creditworthiness. The three-digit number ranges between 300 and 850. The score is a snapshot of a person’s financial standing at a particular point in time. The higher your FICO score, the more likely you will be approved for loans and receive favorable interest rates.
If your score is 770 and above, you will receive the best credit rates. A score of 700 is considered good, according to Fair Isaac. The median score is about 725. If your credit score dips below the mid-600’s, you generally qualify only for “subprime” lending and the interest rate starts to climb significantly, as per the myfico web site.
Your FICO score is calculated from a lot of different credit data in your credit report. The following percentages reflect how important each of the categories is in determining your score: payment history 35%, amounts owed 30%, credit history length 15%, new credit 10%, and credit types used 10%.
These percentages are based on the importance of the five categories for the general population. [Note: For people who have not been using credit long, the importance of these categories may be somewhat different.] Your income, savings, retirement plan, real estate, and mutual fund portfolio or other investments do not factor into the calculation of your FICO score. There are recent changes to FICO score calculation. FICO will no longer include displaying settled bills and will give less weight to unpaid medical bills that are with collectors.
Contrary to common belief, Fair Isaacs Corporation does not maintain a database of everyone’s FICO score. Instead, the score is generated by one of the national credit bureaus from which the lender has requested the report. Fair Isaac provides the credit bureaus with software that is used to calculate the score. The software contains an algorithm, a mathematical formula derived from random samples of consumers’ credit information.
In order to obtain your FICO score, you need to pay a fee, currently $19.95. Check out myfico. By law, you can obtain a free copy of your credit report once a year by visiting annualcreditreport or you can request the report by phone or mail:
Toll-free number: 877-322-8228 Mailing address: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281 Requests by phone or mail will be processed within 15 days of receipt.
[A note of warning: If you order your report and you see company inquiries listed on there that you do not recognize who’ve requested a copy of your report, you might be the victim of identity theft. The only way for someone to request your report is with your authorization. If you have not signed a consent/release form authorizing the release of your report to any company listed on there, you need to start digging to find out what is going on. You’ll either want to put a fraud alert or freeze on your report. You only need to notify one of the three credit bureaus, Equifax, TransUnion, or Experian and they will notify the other two bureaus. Because of identity theft, it is very important for you to monitor your credit.
Also, make sure you shred, with a cross-shredder, all your credit card offers and any correspondence that contains your personal identifying information. Crooks engage in “dumpster diving” to obtain your information. Never sign the back of your credit cards or ATM cards. Instead put “Photo ID Required” in the signature block. In this way, if your wallet or purse gets stolen, no one can copy your signature. Make copies of the front and back of any credit cards and ATM cards that you carry. If they get stolen, you know exactly what cards were stolen and you have the telephone numbers to call and the card numbers, so you can cancel them. Remember to report them as soon as possible. You are liable for up $50 on credit cards and up to $500 on ATM cards.]
Having an excellent FICO score does not mean that you are doing well financially. It means that you are managing your debt very well. Your goal is not to build an excellent credit score. Your goal is to build wealth for the use in God’s kingdom. However, don’t go out and wreck your credit score just because.
When you have an excellent FICO score and credit rating, you are more likely to get lower interest rates on homes and other loans. Also, if you are going to rent an apartment or home, your FICO score and credit report are checked. Having a low FICO score might prevent you from being able to rent the apartment or house you want. Additionally, many employers check your FICO score and credit report before they hire you. They are more likely to hire someone with a higher FICO score and good credit. Always remember that if you save money and can pay cash for a home or a car, then a FICO score does not matter, but it does matter for employers.