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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
Credit Damage 714 441-0900 http://www.creditdamage.com
Cathy Taylor is a marketing consultant with over 25 years
experience. She specializes in internet marketing, strategy and
plan development, as well as management of communications and
public relations programs for small business sectors. She can be
reached at Creative Communications: creative-com@cox.net or by
visiting http://www.creditdamage.com or
http://www.internet-marketing-small-business.com
MORE RESOURCES:
Credit - Google News
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