WHAT IS A FICO SCORE?

If you have ever applied for a credit card, car loan or mortgage loan, you have probably heard the term 'FICO' score, but most people don't know what it is.

In the late 1950's Fair Isaac & Co. (FICO) came up with a scoring software program that would help creditors determine whether or not that particular person was creditworthy. This software program evaluates your credit and assigns it a number score. This virtually eliminates the need for another person to evaluate your credit report. In essence, a FICO score is like a report card of how you manage your credit. Your creditors, like credit cards companies, are the teachers that are grading your credit performance and reporting your performance to the credit bureaus. The higher the score the more likely you will get better rates and larger credit limits. There are three major credit reporting bureaus that collect your credit data and issue a FICO score: Trans Union, Experian and Equifax.

The FICO score range is from 300 to 850. Much like SAT scores are important when applying for college, FICO scores are important when shopping for a loan. A lower score, such as 500, may result in a much higher interest rate or even denial of credit. Sometimes it can even affect a job application. A 'good' credit score depends on the type of financing desired. For example, if you are putting no money down on a home purchase, you will be able to obtain favorable financing if your FICO score is 680 or better. When applying for a real estate loan, most lenders use the middle of the three FICO scores to determine your loan pricing.

There are a number of different ingredients that determine a FICO score. The most widely used are listed below:

• Timely Payments
• Bankruptcy, Tax Liens and Foreclosures
• Collections
• Amounts Owed
• Length of Credit History
• New Credit
• Type of Credit Used
• Recent Credit Inquiries

A combination of these factors establishes your FICO score. If you don't pay your bills on time and are at or above your credit limit, your credit score will be much lower than someone who owes very little and pays on time. It's really that simple.

What it really boils down to is being responsible with your debt. Pay on time, don't overspend and know your limits. Those are the best practices for achieving and maintaining a good credit profile and FICO score.

It is important to know what is on your credit report. To obtain a free copy of your credit report, visit www.annualcreditreport.com. You can get a free report from all three bureaus once a year.