For the last fifty years or so the Fair Isaac Corporation has been publishing some very useful financial information based on the credit reports of consumers. This is the original, so called FICO Score that lenders and stores use to determine if they will allow you to make purchases on credit.
FICO Scores are very influential and are frequently used to determine if you are suitable for jobs, credit, insurance and even dating. This is because it gives lenders and other decision-makers an indication of character without risking charges of discrimination.
How It Works
According to the myFICO.com website the factors used in calculating credit scores are as follows:
- Payment history 35%
- Amount owed 30%
- Length of credit history 15%
- Types of credit in use 10%
- New credit 10%
The term FICO Score has come to represent all credit scores as a generic term. This is partly because credit scores are calculated by all three of the large consumer credit agencies, Trans Union, Experian and Equifax, using formulae based on the Fair Isaac model. That means the published credit scores from each of these agencies should be similar and fairly accurate. You may find a slight variation because the three agencies may occasionally get information that is reported to some of them and not others.
The scores range from a low of 300 up to highs of around 850, where higher is better and relates to responsible behavior. Credit scores below 640 are considered bad and scores above 700 are considered good ratings.
There are some recent variations on the basic credit score that were designed to either standardize scores or are related to specific industries such as insurance. If you register as a user at the creditkarma.com website you can see different versions (although not from all of the consumer credit agencies) of your credit score that serve different financial purposes, for free.
FICO Here FICO There FICO Scores Are Everywhere
Since the Millennium FICO Scores have only increased in importance. Restrictions on information about employees have brought about more usage of FICO Scores for employment purposes. FICO Scores are becoming a numeric measure of character as they are based purely on financial behavior they indicate your level of financial responsibility and trustworthiness.
Consumer businesses like that they can avoid the risk of violating civil rights or fair housing and employment laws. This is in part because of what credit scores do not include. Any information about age, race or religion, or any other status that might be protected by law will not be included. Essentially, it is the safe way to judge consumers without risking a discrimination lawsuit.
When you are intending to take out a mortgage or engage in any consumer transaction that involves real estate your credit history, your FICO Score is a strong indicator of what sort of credit terms you will be able to get from lenders and whether you will be able to borrow at all. It is not the deciding factor however, as lenders will still want to determine your net worth and what sort of payment you will have the ability to pay over the lifetime of the loan.
As with many other aspects of your public life, real estate financing will depend on your credit records. Over the years lenders have determined that there is a strong correlation between credit history of past behavior and the likelihood of appropriate future behavior. Your FICO Score is like a meter that gives an instantaneous snapshot of your credit worthiness.