FICO Credit Scores - What is a FICO Score?

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One of the things that will become a factor when you are applying for a mortgage or home loan is your FICO score. In fact, lots of acronyms tend to get tossed around in the credit industry and this is one of them. So what is a Fico Score? In a nutshell, it's your credit score, but let's take a more detailed look at it.

First of all, the FICO score is created by a company called the Fair Isaac Corporation. And while the FICO credit score is one of the most popular credit scores used in the US, particularly by mortgage lenders, it isn't the only one. VantageScore and CE Score are also pretty popular with lenders, but as a consumer you may never hear them mentioned.

What the FICO score does is give your potential lender (either the bank, the credit card company or the car dealer) a snapshot of your credit situation and a risk assessment for whether or not you are likely to default on your loan. The score is represented by a number between 300 and 850 and it is based on the details appearing in your credit reports.

Higher numbers are better. FICO Scores above 750 are very good and scores above 800 are pretty much phenomenal. Anything lower than 600 is not good at all and will seriously impact your ability to get loans and/or decent interest rates, but even scores between 600 and 700 are not ideal and generally you won't be offered the best available interest rates until you raise your score.

The FICO score takes into account several different factors, such as:

1. Outstanding loan amounts - this is your current debt, but the actual dollar figure of what you owe isn't the only thing considered here. What is most instructive to lenders is the ratio of debt to available credit. If all of your credit cards are maxed out, you represent a greater default risk.

2. Payment History - do you pay your bills on time or are you chronically late with payment every month? Also included in your payment history is whether you have ever defaulted on a loan.

3. Credit history - This is how long you have had credit available or in use. Basically, if you have no credit cards or have your first credit card, the lender won't be able to determine what kind of risk you represent, so they'll automatically assume that you are high risk just to protect themselves. Also, they like to see long-term relationships. So don't close out that credit card you just paid off. Keep it open, but stick it in a drawer if you need to. Maintain that credit relationship.

4. New Credit - if you've recently applied for lots of new credit, the lender will consider this suspiciously, but that isn't the only thing to take into consideration. Generally, if you are planning on getting a home loan, you don't want to be out buying a new car or vice versa.

5. Types of credit - lenders like to see some history for different types of credit. They want to know that you are as careful with credit cards as you are with your car loan and that you didn't default on your student loan. Various credit types include credit cards, charge cards (such as a Sears card), personal loans, auto loans, home loans, student loans, etc.)

Naturally if you've ever had a bankruptcy or had a judgment placed against you, that will affect your score as well, quite negatively!

Now, if you already know your FICO score and aren't happy with it, there is a lot you can do. Almost all of the criteria that it considers are factors that you can influence and they can be improved with some work. Getting the outstanding debt reduced and improving your payment history is something you can start right away, but to really repair your credit score you are going to want to take a look at the big picture, which means getting copies of each of your credit reports.

You can get annual credit reports for free once a year from the three major credit bureaus and then once you have those in hand, be sure to take a look at the Credit Secrets Bible for the most effective tips and strategies for improving your credit score as quickly as possible.

Emma Martin used to have serious credit card issues, but now she is debt free and socking all of her extra money into retirement savings.

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