What is FICO ?
One very important element in your overall credit worthiness package is your FICO score. But what exactly is that and how does it affect your debt management choices?
The Fair Isaac Corporation was the creator of FICO and the acronym comes from the corporation’s name. The corporation developed a proprietary algorithm which rates your credit worth on a scale between 400 and 800 – the higher your number the better your credit worth. Other companies adopted this method with a few variations.
A clear explanation of how the algorithms calculate your credit worth has never been disclosed to the general public. However through cause and effect some have been able to deduct some factors that can affect your scores. It has been noted that your number of credit cards or the number of credit checks run can have a minimum affect your rating. However, late payments, especially payments received extremely late, have a much greater impact on your scores. Also, your overall debt amount is an important factor that has great impact.
Any score below about 620 is considered marginal and below 580 is decidedly poor. 720 and above is very good to excellent. A range between 620 and 720 represents a kind of gray area, where items other than your FICO will play a more significant role in loan decisions.
Banks, mortgage companies, credit card issuers and other lenders will use your FICO score as a very important criteria for deciding whether to make a loan, and at what interest rate. Other things being equal the higher your score the better interest rate you can obtain.
Your FICO is clearly not the only factor that lenders consider when making a loan and assigning interest rates. Today’s average rate of interest, the current status of the lending market and the overall economy all have an impact on lenders’ decisions.
The ever growing reliance on computers and modern technology in the finance world has changed the underwriting of loans dramatically. In addition, the Internet has greatly influenced the world of finance. These two variables have put a new face on the lending industry in recent years.
Despite all these changes, or possibly because of them, your FICO is a key factor considered by lenders. Though it is not the only thing considered, it carries a lot of weight in deciding whether or not you will be approved for a loan.
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