What exactly is a FICO score?
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For those of you who do not know, your FICO score is a 3 digit number that determines the amount of interest you will end up paying on your credit cards, auto loans, and mortgages. On top of that, your FICO score can also play an important role in determining whether you will get that new cell phone contract or whether you will get the apartment you always wanted.
Just about every financial decision you make will revolve around your FICO score. If you do everything you can to protect your score, you will be rewarded with low interest rates. If don't take care of it, expect it to lash back at you by making sure you get the highest rates and frequent credit rejections.
FICO stands for Fair Isaac Corporation. The Fair Isaac Corporation is the company that created the FICO formula.
To the business world, your FICO score is an indication of how well you will do at handling your loans and credit cards, or whether you are a solid candidate for the job or apartment you are requesting.
With a high FICO score, you can expect a great reputation with the business world; you will get the best of the best deals. A low FICO score translates into paying more interest rates on credit cards and loans.
Your FICO score is based on the way you spend, your bill-paying habits and your overall debt load. The people you do business with, from lenders to credit card and phone companies constantly report on your financial activity to one of the three major credit bureaus.
The formula for your FICO score is determined by the following 5 categories:
| Record of paying bills on time | 35% |
| Total balance on your credit cards and loans compared to your total limit | 30% |
| The length of your credit history | 15% |
| New accounts and recent credit applications | 10% |
| Mix of credit cards and loans | 10% |
Your FICO score can range from 300-850. If you your score is between 300-500, you have bad credit. Obtaining credit is going to be very hard for you. If you do obtain credit, the interest rates are going to be very high.
The range of your credit score will ultimately decide what type of rate you get. On a 30 year fixed-rate mortgage, that can mean a 3.5 point difference on your interest rate. On a four-year car loan it can mean a 10 point difference on your interest rate.
On a 30-year fixed-rate mortgage, a FICO score of 720-850 will typically get you a 6% interest rate while a score of 500-559 will typically get you a 5.9% rate.
On a four-year auto loan, a FICO score of 720-850 will typically get you a 5.1% interest rate while a score of 500-589 gets you a 15.8% interest rate. That difference equals an extra $4,944 for that four year loan.
You see the importance of your FICO score. Treat your credit with respect. A good score will get you great rates. A bad score will haunt you for a long time. Take care of yourself and your credit.
This article was written by Jonathan Radande for Creditlovers.com.
Posted by jonathan on March 08, 2005 at 06:03 PM