The Basics of FICO Credit Scores
Whether we like it or not, credit scores play a very important role in our lives, especially when we are not really endowed with a lot of cash to begin with. There will then come a time when we would need to take out loans to compensate for the lack of cash, and the successful application of such loans would largely depend on our credit scores. So, is your credit score your friend or your foe? That is totally up to you.
The smartest thing that you can do before you start applying for loans and even for credit cards is to know just what exactly you are getting yourself into. The FICO score is actually the credit score that is commonly used by today’s lenders, banks, and other kinds of financial institutions. FICO actually stands for the company that developed this type of score, which is the Fair Isaac Company. This company’s specialty is in the line of constructing scoring models based on statistics.
Fair Isaac Company used the credit data of millions of consumers to develop their own scoring model. The mathematical algorithm that they developed is quite complicated and is kept a renowned secret in the industry. Since FICO is the sole owner and developer of the model, then the primary elements that comprise their credit score system remains a secret as well.
Credit scoring is basically a method that determines how likely credit users would pay their bills full and on time. The FICO scores usually have a range of 300 to 850. The higher the score, the better it would be for the credit user. If a credit user scores higher, then he is then viewed as a better risk to do business with than a credit user who scored lower. Most credit users today have a scores ranging from 600 to 700.
The three major credit bureaus today, comprised of Experian, Equifax, and TransUnion, make use of the FICO software for the calculation of the scores of credit users. These scores are then sold to lenders. However, it is important to note that the credit scores of each agency may differ because the information collected here would come from several creditors. Moreover, the agencies do not really update their records all at the same time so there would certainly be discrepancies to watch out for.
Always remember that the FICO score uses just the information found in the credit reports of consumers as its basis. It does not really take into consideration the consumer’s assets, income, and tenure in a particular office. Thus, make sure to consider these additional factors with the FICO scores generated.
