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What
is a FICO Score?
The
most accurate gauge for our performance in school is our
report cards. The most conclusive measure
for our performance at work is our evaluation report. The most
definitive barometer of our performance in any video game is
our game score. In the same light, the most definitive criterion
for our financial fitness is our FICO score.
Our FICO score has deep repercussions for our financial lives,
and consequently, for our daily lives as well. Much as we would
want to contest the belief that money makes the world go round,
there is more truth to such a statement that we can ever deny.
Hence, our FICO score plays a crucial part in our dealings
in society.
What Is A FICO Score?
The acronym FICO stands for Fair Isaacs Company, the very
first establishment to use a credit scoring system for the
purpose of determining the risks involved whenever they extend
credit to their applicants. Throughout the years, this credit
scoring system became an industry standard that serves a lot
of purposes in the modern day world.
Today, whenever people refer to a FICO score, they mean your
credit score which is based on the aforementioned Fair Isaacs
Company scoring system. Why is this important? It’s because
your FICO score is a more or less accurate gauge that is used
by lending institutions to determine your ability of paying
off a debt. The higher your FICO score is, the more capable
you are of satisfying the loan in full, the less of risk you
can be as an investment for the lending companies. A high FICO
score therefore would allow you to secure a loan much easier
than a person whose financial capabilities are placed in doubt
because of their lower FICO score.
Your FICO score would also be used as a measure to determine
how big or how small the applicable interest rates can be.
Low FICO scores, being higher risk investments for the lending
companies, would merit higher interest rates. High FICO scores,
being safer investments, would need only low interest rates.
What Comprises Your FICO Score?
Your FICO score would be the net result of several factors.
Let’s take a look at how they comprise your financial identity.
- Outstanding
debt, which comprises 30% of your FICO score. This would
tell the lending company how much of your existing
credit is being eaten up by existing loans.
- Length
of credit history, which comprises 15% of your FICO score.
If you have been paying a loan of significant amount
over a long period of time, then this would fare well with
the lending companies as it establishes a level of commitment
they would want to see.
- Recent
inquiries, which comprise 10% of your FICO score. An inquiry
is equivalent to a loan application. The more inquiries
you have, the lower your FICO score would be.
- Credit
balance, which comprise 10% of your FICO score. Credit balance
is the difference between the current amount of your
existing loans and the original amount of the same. The bigger
the balance, the lower your FICO score.
- Payment
history, which comprise a whopping 35% of your FICO score.
This includes everything, from the timeliness of your
payments, to the number of bills you have failed to pay, to
the bills that have been forwarded to collection companies.
Maintaining A Good FICO Score Is Essential For Your Financial
Health
There will always be those times when we would find ourselves
in a financial rut. These are the times when bills become due
almost simultaneously, when satisfying them is rendered impossible
by the other financial demands of our life.
Acquiring loans would help bail us out of these difficulties.
In certain cases, loans are quite necessary for our survival.
It would be to our best interests that securing a loan be easy
and almost guaranteed. A good FICO score would help achieve
this, and give us a better position to resort to loans whenever
the needs arises.
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by SolveYourProblem.com : 2006
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