Many people know that they have a credit report which is kept by several major credit bureau and a very important element of your credit report is your FICO score. But what is your FICO score and just does it affect your debt management choices?
FICO is an acronym formed from the initial letters of the Fair Isaac Corporation who worked out this system of credit scoring and is a number which is generally between 350 and 850 which ranks credit worthiness according to the proprietary algorithm devised by the company, with 350 being the poorest score and 850 being the best.
Despite the fact that the details of the algorithms are a closely guarded trade secret, over the decades a lot of people have be able to word out many of the more important elements. For example, any late payments will lower your score and the more late payments you have and the later they are the more heavily the credit score will be lowered. Another factor is the overall amount of debt which is carried each month. A not quite so important factor is the number of credit cards you have and the number of credit checks performed out on your account.
Any score of below approximately 620 is considered to be marginal and a score of below 580 is decidedly poor. A score of 720 or more is considered to be very good to excellent. A score which comes in between 620 and 720 represents a kind of gray area in which factors other than your merely your FICO score will play a more significant role in any loan decisions.
Banks, mortgage companies, credit card companies and other lenders will use your FICO score as an extremely important element in deciding whether to grant you a loan. Lenders will also take your score into account when setting the interest rate to charge you. Everything else being equal the greater your score the lower the interest rate you will have to pay.
In many cases of course everything thing else is not equal and general interest rates, the current demand for loans, the general economy and a host of other factors have a significant influence on whether lenders will grant loans and at what rate.
Yet another very important factor in the equation these days is the widespread use of computers which has altered the financial industry significantly during the past 20 years and provided consumers with far more fast access to services and products through the Internet.
Even with all these changes the FICO score is still a main tool for the majority of lenders and, though it might not determine the final decision, it most assuredly influences the 'first cut' when presented with a pile of applications to either approve or disapprove.
Fortunately for those people who are in some financial difficulty there are alternatives and even if your FICO score is low you nevertheless have several options open to you. The first thing you ought to do however is to set into motion a plan to raise your credit score.
As you work to remove your outstanding overdue debts by paying them off or negotiating with the lender your credit score will slowly increase. And bear in mind that the age of your 30 and 60 day past due and late payments is an element in computing your credit score.
While you are improving your score though you can also shop around for lenders willing to take a higher risk by lending you money. The downside is that those loans nearly always carry a higher rate of interest. If possible your best approach is to see if you can go without borrowing for a while while you work to increase your credit score.
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