Why Is Your FICO Score Important?

March 13, 2009 by  
Filed under Credit Reports

When keeping track of your budget, saving as you should, and handling money responsibly still doesn’t qualify you for a much-needed loan, you probably need to take a look at your FICO score. This number reflects your creditworthiness, and can greatly influence your debt management program.

Fair Isaac Corporation founded the FICO score and the method with which it’s calculated. Your FICO score may be anywhere between 400 and 800, and the higher the better. Some other companies may use a letter grade system that is based on similar calculations used in the FICO.

The algorithm is a proprietary piece of information known only to Fair Isaac, but there are several items that have been determined to directly raise or lower your score. Late payments and the number of them will lower your FICO, as well as the total debt carried in relation to your income.

Scores of 720 and above are extremely good and optimal choices when awarding new lines of credit. 620 to 720 scores are considered on a case-by-case basis, as these people may provide good and bad credit situations. Anything below 620 is considered fair to poor, and these scores are unlikely to obtain any new loans or credit.

Some lenders will consider things other than a FICO score when making loan decisions, such as whether you own your home, if you have a history established with the lender, and how long you’ve been at your current job. Investments and retirement accounts may also be considered in this decision – especially if your score falls in the 620 to 720 range.

Virtually every establishment you have ever held an account with will report information that affects your FICO score. Credit cards, auto loans, home equity lines of credit and student loans will all be reported and associated with you. Good information always remains on your credit, and bad information is erased in 7 to 10 years after paying off the debt, such as collection accounts.

Lenders will look at the histories of these accounts listed on your report to establish whether you are worthy of a loan and what interest rate you qualify for. Better FICO scores qualify for lower interest rates, which effectively makes purchases less expensive in the long run. Other factors that may influence the issuing of a loan or line of credit is the demand versus supply of lendable funds, current interest rates and the current state of the economy.

Improving your FICO will not only increase your chances of being approved for a loan, but will also qualify you for a less expensive one through lower rates. Developing a debt reduction plan to pay off old collection accounts or bad debts, credit card balances and student loans will gradually increase your FICO score.

It is suggested that if your score is lower than needed, you should delay seeking credit while you reduce debt and improve your situation. In addition to the lower interest rates you’ll qualify for, inquiries into your credit score from lenders, if excessive, can also reduce your FICO score.