Saturday, December 29, 2012

FICO - the U.S. credit score system

FICO = Fair Isaac Corporation

What is your FICO score?

What do you mean "you don't know?"  Every U.S. tax person has a FICO score.  Whether you’re buying a home, a car or applying for a credit card – lenders want to know the risk they’re taking by lending your money.  FICO scores are the credit scores that most lenders use to determine your credit risk.  Your FICO credit scores (you have 1 score from each of the 3 major credit bureaus) can affect how much money a lender will lend you and at what terms (interest rate).  

So, taking steps to improve your FICO scores can often help you qualify for better rates from lenders – which can save you money!

FICO scores range from 300-850 and higher is better. 

You can also see that your FICO score looks at several major categories as shown by the key ingredients in the pie chart above.  For more information about these general categories, see the What's in your score page.
Your FICO score is calculated using the information in your credit reports. These reports contain all of the information that each credit bureau has on file about you. This sample credit report shows a few examples of the types of information that the credit bureaus collect, such as your credit accounts, how many times lenders have requested information about your credit (Inquiries), and how many times lenders have turned your account over to a collection agency (Collections).

3 Important Things You Can Do Right Now

  1. Check Your Credit Report – Credit score repair begins with your credit report. If you haven't already, request a free copy of your credit report and check it for errors.  Your credit report contains the data used to calculate your score and it may contain errors.  In particular, check to make sure that there are no late payments incorrectly listed for any of your accounts and that the amounts owed for each of your open accounts is correct.  If you find errors on any of your reports, dispute them with the credit bureau and reporting agency.
  2. Setup Payment Reminders – Making your credit payments on time is one of the biggest contributing factors to your credit score.  Some banks offer payment reminders through their online banking portals that can send you an email or text message reminding you when a payment is due.  You could also consider enrolling in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account, but this only makes the minimum payment on your credit cards and does not help instill a sense of money management.
  3. Reduce the Amount of Debt You Owe – This is easier said than done, but reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score.  The first thing you need to do is stop using your credit cards.  Use your credit report to make a list of all of your accounts and then go online or check recent statements to determine how much you owe on each account and what interest rate they are charging you.  Come up with a payment plan that puts most of your available budget for debt payments towards the highest interest cards first, while maintaining minimum payments on your other accounts.
Get educated, financially literate and stay informed about your credit score.  You FICO score is relevant for almost anything financial, from mortgages, to car loans, to mobile telephone accounts and more.  Know your score, and protect your information.  

For a low monthly fee myFICO will track and report changes to your credit profile automatically, including updating you on your score every few months, informing you of any credit applications (that you made, or that someone may have made using your information), changes to your address/telephone information detected, and more.  Log onto their website for more information.

Disclosure: I am a myFICO client, enrolled in their monthly tracking program (cost: about $5/month)