FICO, What is That?

by William Blake

One very important element in your overall credit worthiness package is your FICO score. But what exactly is that and how does it affect your debt management choices?

The Fair Isaac Corporation was the creator of FICO and the acronym comes from the corporation’s name. The corporation developed a proprietary algorithm which rates your credit worth on a scale between 400 and 800 – the higher your number the better your credit worth. Other companies adopted this method with a few variations.

A clear explanation of how the algorithms calculate your credit worth has never been disclosed to the general public. However through cause and effect some have been able to deduct some factors that can affect your scores. It has been noted that your number of credit cards or the number of credit checks run can have a minimum affect your rating. However, late payments, especially payments received extremely late, have a much greater impact on your scores. Also, your overall debt amount is an important factor that has great impact.

A credit score of 720 or higher is excellent, whereas a score of 620 or lower is considered borderline. Any rating below 580 is a bad score. If your rating is between 620 and 720 a lender may feel that your credit worth is difficult to determine solely based on your FICO and will research other information to determine if you are a good credit risk.

Lenders of all types, credit card companies, mortgage companies and banks rely heavily on your FICO when determining whether to extend you credit or loan you money. Your scores also have an impact on what interest rate you will be offered.

Your FICO is clearly not the only factor that lenders consider when making a loan and assigning interest rates. Today’s average rate of interest, the current status of the lending market and the overall economy all have an impact on lenders’ decisions.

The ever growing reliance on computers and modern technology in the finance world has changed the underwriting of loans dramatically. In addition, the Internet has greatly influenced the world of finance. These two variables have put a new face on the lending industry in recent years.

Even with all these changes, though – or, perhaps in part because of them – the FICO score remains a primary tool for lenders. It may not determine the final decision, but it definitely influences the ‘first cut’ when presented with a stack of applications to approve or disapprove.

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