How Does FICO Works In The Credit Industry? By Tom Atkins At Isnare.com Ezine Articles

Do you understand your FICO score? When your credit history is reported it is shown as a three-digit number. It’s important that you know what that number is, particularly if you plan to use credit to make purchases. This three-digit number is known as a FICO score. FICO stands for the Fair Isaac and Company which began credit scoring sometime in the 1950’s. Their strategy was to use 30 different factors to determine risk. The three major credit bureaus, Trans Union, Experian and Equifax, use FICO scores when making credit reports.

This method of scoring is used to assess the possibility of your loan defaulting. The credit card and installment loan industry have used this method for a number of years. The mortgage industry is using this scoring system as well. A credit score will help lenders simplify underwriting by categorizing borrowers more quickly. If you have a high credit score your application will probably get a superficial but positive review. Wherein, a low credit score may get a quick review and a quick denial.

Credit scores fall between 300 and 900. Most consumers score between 500 and 800. A score in the 500s is very low. This indicates to the lender that the borrower is a high risk. A score in the 600s is medium. In this case your payment history will be closely examined. More than likely, written explanations will be required to explain your derogatory credit before you are issued new credit. Some lenders will not extend credit to consumers with a score less than 640. A FICO score of 680 or higher is considered high. This translates into low risk for the lender and lower costs for you.

Each reporting agency provides up to four reason codes when they post FICO scores. This helps the consumer understand why they received a low score on their credit report. The reason codes are the main factors that contribute to the consumer’s score. If you address these factors, your FICO score may be affected in a more positive way. The following is a list of factors that impact your FICO score:

1. Numerous accounts opened within the last twelve months.

2. No current credit card balance.

3. Short credit history.

4. Delinquencies

5. Credit card balances near their maximum.

6. Tax liens, judgments or bankruptcies.

7. Excessive credit inquiries.

8. Not enough revolving credit accounts.

Remember, FICO scores are only guidelines. Factors other than FICO scoring can impact underwriting decisions. The following examples of compensation factors may help a lender to be more lenient:

1. A larger down payment.

2. Low debt-to-income ratio.

3. Excellent history of saving money.

4. Previous paid loan with current lender.

5. Available home equity or collateral.

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