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What Is a FICO Score and How Do I Make It Work
for Me?
Whether or not you receive a loan and what interest rate you get on
your credit card may be determined by something called a FICO score.
Named for Fair, Isaac & Co., a California-based company that
developed the credit score, the FICO score is the most widely used
scoring method to determine credit worthiness.
Scores range from approximately 300 to 800 and are provided to
lenders by the three credit bureaus, Equifax, Experian, and
TransUnion. You also have access to your FICO scores, but will be
charged a fee by each credit agency providing your report.
According to Fair Isaac, the credit scores of the American public
are divided as follows:
• 499 and below 1 percent
• 500-549 5 percent
• 550-599 7 percent
• 600-649 11 percent
• 650-699 16 percent
• 700-749 20 percent
• 749-799 29 percent
• 800 and above 11 percent
A score of 720 or higher will probably get you the best interest
rates on a home mortgage. Your credit card company looks at your
credit score to decide whether or not to raise your credit limit or
charge you a higher interest rate. The higher your credit score, the
better you look to lenders and the lower your interest rates.
Raising your FICO score can make a big difference to your wallet.
Some basic actions you can take to improve your score include paying
your bills on time, lowering your account balances, and not taking
on new debt.
Around the time you intend to apply for a loan, several factors can
decrease your FICO score and, therefore, your ability to qualify for
credit and low interest rates. First, order copies of your credit
report from all three bureaus and correct any errors you find. Be
sure that balances you have paid down are reflected on the report,
along with closed accounts and settlements.
It’s important to get your credit scores from all three credit
reporting agencies. Each bureau may have different information about
you as reported by retailers and creditors. Clerical errors at a
particular agency may also result in a varying score. Lenders often
look at all three FICO scores, and rather than using the average of
the three scores, they may use the middle score to determine your
credit worthiness. Finding out what this middle score is and doing
what you can to raise it is to your advantage.
Second, pay what you can on your debt rather than moving it around.
Consolidating your credit card debt may be tempting, but it could
lower your FICO score. Here’s why: keeping your account balances
between 25% and 50% of your available credit, signals a responsible
borrower. For example, if you have a credit card with a $2000 limit,
you should keep your debt below $1000. The ratio of your credit card
balance to your credit card limit will increase if you pile all of
your debt into a couple of accounts, rather than keeping it spread
out over several.
If you have three credit cards with limits of $2000 each, and you
owe a balance of $1500 on all three combined, you have a total
credit limit of $6000 on which you owe a balance of $1500. That’s a
debt to credit limit ratio of 25%. But if you consolidate your $1500
debt into one card with a $2000 limit, you increase your debt to
credit limit ratio to 75%, an unfavorable factor in your overall
credit score. For this reason, the best solution is to simply pay
off your existing cards as quickly as possible.
Also important in making the most of your FICO score near loan time
is keeping unused accounts open, for the same reason as listed
above. Your debt to credit limit ratio will rise drastically if you
close your unused accounts. Wait until you have secured your loan to
trim inactive accounts from your credit report. Also refrain from
applying for any new accounts during this time.
Paying off your debt in a timely manner, building a solid credit
history over a lengthy period of time, and erasing errors from your
credit reports can all help you make the most of your FICO score
and, in the end, make the most of your money.
Resources:
Equifax 800 525-6285 http:///www.equifax.com Experian 888 397-3742
http://www.experian.com TransUnion 800 680-7298 http://www.tuc.com
For more information about identity theft prevention contact Cathy
at 949 635-4923
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