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From Fico To Fair Isaacs
When you apply for a loan, you’ll have your FICO, or a fair issac credit score, checked out by the lender. It is very important that you understand what this score is and how it can affect what happens to you next.
The fair isaacs credit score is the measurement by which it’s determined by creditors, who don’t know you from Adam, whether or not you’re a good credit risk–that is, if you will probably be able and willing to pay back the money and the due interest.
In theory, the highest possible fair issac credit score is 850, but practically nobody, even the best credit risk, has this score. A score over 800 is virtually “pristine”, and a score over 700 will be able to get you the best available loan program for what you want. In today’s crunched market, the lowest credit score that you can have and still get a decent interest rate is about 620. If your score is below this you will have difficulty securing a good interest rate and you many not qualify at all for the loan you want, depending on other factors. A score below 500 is like a “D-” or even an “F” on a report card.
Your fair isaac credit score is a statistical composite of a number of different factors. As you might assume, one of the heaviest of these factors is how timely you are with your existing debt payments. By law, you are always given a “grace period” of at least 30 days of being late on a payment, but after that if you still have not paid you can be reported by your creditor to a credit reporting bureau; if this happens you score is lowered. But if in the future you catch up and then get back to making payments on time, you score will rise again from whatever point is has reached.
The worst thing that can happen to your credit score information is your declaring bankruptcy or being foreclosed on.
Another one of the weightiest factors in the credit score is how much debt you carry. Statistical models prove that after a certain debt load the average person is in trouble, no matter how well-intentioned they are or how responsible they have previously been. Use of a lot of debt lowers the score. However, lenders will also look at income and assets and if these are high the high debt load won’t matter as much to them on a practical basis.
Whenever you even apply for a potential new line of credit, your fair isaac credit score is diminished. Why? It’s assumed that if you are looking to take on more debt, you’re having problems with cash flow, even if it’s “normal” debt-seeking such as a mortgage. For this reason, try to screen potential lenders out before you apply with them, so that you only need to apply to a small number. And decide very, very carefully whether you really need to borrow at all.
Other factors that weigh in on the calculation of your score are how long you have had any credit history at all and what kind of debt you most use. Lenders want to see a record of debt payment responsibility; so this is why “pristine” first-time borrowers often get turned down, though they might have thought that by always paying cash they were being responsible. On the flip side, people who use credit cards heavily have their credit score lowered somewhat because of perceived lack of responsibility. If you have just one credit card, use it once in a while, and pay off the full bill when it comes due, you can substantially raise your fair isaac credit score.
Technorati Tags: debt management, credit crunch, personal loan, debt management program, credit crisis
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