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FICO Score and How It Determines Your Credit Risk

Posted by J.S.

July 21, 2008

The first question that almost every lender will ask is, do you know what your FICO® Score is? Most people have more than likely heard of this term, but they do not understand exactly what it is or how it might work. The FICO® Score, essentially is what determines your creditworthiness, or how much of a risk you may be to a particular lender. The score normally will range between 300 and 850, with the highest numbers representing the best borrowers.

The majority of credit bureau scores in the United States are produced by Fair Isaac and Company, or FICO®. The three major credit reporting agencies, or bureaus, are TransUnion, Equifax and Experian. They all provide FICO® Scores to lenders, and they all three use a slightly different formula to make their determination on what score will be given for your credit rating. All three could have identical information and the scoring system would be different.

However, most of the time they do not always end up having the same information in being able to determine your credit score. This is simply because not all businesses such as credit card companies, auto lenders, home mortgage companies, and various others will use the same agency to report any type of activity on your account.

There are specific factors that will influence the overall credit score. Issues such as your personal payment history on your accounts, any outstanding debts that you may have, the amount of credit you have versus what you have available, how long you have had each line of credit and very importantly, any derogatory or negative information that may be on your accounts. The frequency of late payments, any charge-offs or collections and a big factor is bankruptcies or credit repair companies you may have used.

There are also other factors that are weighed in determining your credit risk that do not have anything to do with your credit or any open accounts at all. Those factors are issues such as how long have you lived in your current home, how often do you move, or the length of time you have been at your job. It is never a good idea to change jobs right before applying for any type of credit, but especially so if it is a home or automobile loan. Lenders like stability.

Following a few simple steps can optimize your credit rating: be sure to always pay your bills on time or even before they are due, try to always ensure that you use 30% or less of the credit that is available to you, take the necessary precautions to always ensure that your good name is protected from the chances of identity theft. Protect your credit rating.