FICO and Credit Scores

FICO and Credit Scores are “grade marks” for how you behave financially. They estimate the risk of lending you money or providing you with a service. More specifically – they try to predict the likelihood that you will make payments on time in the next two to three years.

Your credit score is the single most important number in your financial life. It determines whether or not your application for Mortgage, Car Loan, Credit Card etc. will be approved, and more importantly – it set the terms you’ll be offered.

There are over dozen different credit scores in use today, but FICO is the most commonly used score, with more than 90% of creditors and lenders using it for making their lending decisions.

In general, the higher your score is – the less risk you represent to a lender or a service provider and the better term you will be offered. Poor credit score can cost you tens of thousands of dollars in excess payments and higher interest rates, as this table demonstrates.

• Payment History – Are you paying your bills on time? Have you ever been late? Have you ever been contacted by a collection agency? Have you ever declared bankruptcy?
• Credit Utilization – The more money you owe, the lower your score will be.
• Credit File Age – The longer you’ve had credit, the higher your score becomes.
• Credit Diversity – The more different types of credit you use, the higher your score becomes.
• New Credit – The more you search for new credit, the lower your score will be.

For a specific look into the FICO score formula please see this.

Who Sell Credit Scores?
There are 3 major credit bureaus – Equifax, Experian and TransUnion. These credit reporting agencies (CRAs) collect personal financial consumer information in files, called Credit Reports. This information is fed into complex mathematical models that produce Credit Scores, which are sold to potential lenders, insurers and other financial institutions.

Whenever you apply for credit, the potential lenders pulls your credit reports and scores from one, two or all three bureaus and reviews them as part of their lending decision.

What is a Good Credit Score?
A FICO score of 680 and higher is considered good. But things are a little more complicated, as explained in What Are Good Credit Scores.

Where Can I Get My Credit Score?
Under the Fair Credit Reporting Act (FCRA) which regulates consumer credit information, you have a right to receive a free copy of your Credit Report from all the 3 major credit bureaus every 12 months. This however does NOT include your credit score. Credit scores are sold to consumers by the credit bureaus and by myFico.com (owned by the company that created FICO). See Free Annual Credit Score for more information.

Suggested Reading
Understanding Fico Scores
FICO Score Formula
How Things Affect Your Credit Score