Credit has such a huge impact to any country’s economy. Credit, as defined by Merriam-Webster, is “money that a bank or business will allow a person to use and then pay back in the future” and “a record of how well you have paid your bills in the past.” For purposes of the FICO Score, the second definition has more bearing.
FICO Score Overview
In 1989, FICO introduced the FICO Score. The purpose of the score was to determine a person’s credit worthiness. It primarily determined who are qualified for mortgage loans. Today, the FICO Score is widely used by banks and businesses in the US and Canada.
The FICO Score is highly determined by the information provided by the three national credit bureaus: Experian, Equifax, and TransUnion. There may be a time that a single person’s FICO Score may vary because of the difference of information provided by each bureau.
There are different factors to determine the FICO Score of a person. These are:
1. Payment history (35%);
2. Debt burden (30%);
3. Length of credit history (15%);
4. Type of credit used (10%), and;
5. Recent searches for credit (10%)
The sum of all this arrives at 100%. The information provided by the three bureaus would result in a score for each factor. The sum total would be the FICO Score of a person. A higher credit limit would also positively affect their FICO Score. There are also other special factors that can affect the FICO Score, such as money judgments or tax lien.
How Important Is The FICO Score?
FICO Score is now one of the most popular, inexpensive, and reliable credit scores in the market. As such, banks and businesses rely on the FICO Score of a person to determine the risk of lending to the same. Even insurance companies are known to use credit scores in determining the risk of a person being insured.
Basically, a person’s FICO Score determines his capacity to maintain and structure his finances. Remember that each factor will work for you or be counted against you. It will determine how well you have managed your income to debt ratio.
How To Improve Your FICO Score
As the importance of a person’s FICO Score is apparent, there are ways to improve that score. First of all, always see the factors listed as your guidelines. Check your credit history and see if there are a lot of missed or late loan payments made. If they happened years ago, make sure to use the future to improve it.
Also, don’t worry about minor flaws in your credit history. Such small details will not make a huge dent on your FICO Score. However, make sure they don’t happen often. Something small, if repeated enough times, will have a huge effect.
Another thing is to have a larger credit limit. Banks and businesses prefer someone who has a higher credit limit. In layman’s terms, you have a lot of money. Having different kinds of loans is also a good thing. A long standing credit history is also a good indicator that you can manage your loans well and pay them on time.
A score may just be a number, but the FICO Score should not be ignored. In the USA and Canada, a person’s FICO score can mean the difference between getting a loan or not; between getting a job or not; or getting a credit card application approved or declined.