A good credit score is the key to a healthy financial record

Most people are at least vaguely aware that a credit report is used by lenders to determine whether or not a loan will be granted to them. Fewer people are familiar with something known as a FICO score. The FICO score is named after the company that developed it, Fair, Isaac and Company. Their work distills the contents of someone’s entire financial history into a three digit number. What is this FICO thing? How is it obtained? 

All three major credit reporting agencies, Equifax, Experian, and Trans Union, use the FICO figure determine the value for it separately, using their own records. These institutions keep track of the financial transactions of millions of Americans and provide that information to lenders upon request in the form of a credit report. That report includes the FICO score, a number ranging from 300 to 850. The higher, the better; the national average is 723. This figure is used by lenders, employers, landlords, insurance companies and any other place of business that needs to obtain a “snapshot” of an individual’s financial standing. 

The FICO figure is important, but few consumers understand how it works.

• 35% of the score represents the payment history of the person in question. This portion of the score is created from information regarding previous loans and whether or not they were paid on time or paid in full. Any late payments on installment loans are incorporated into this portion of the score.
• 35% of the score is created by assessing current debts and the ratio of debt to available credit. This is where a borrower can be hurt by having too many credit cards or too large a balance on the cards they have. If your credit cards are maxed out, this portion of the score will reflect it.
• The remaining 30% is determined by the length of credit history, the types of credit the borrower has had, and the number of recent loan applications the individual has made. A longer history is better, as it helps lenders make a more accurate assessment of an individual’s ability to repay a loan. As for the types of credit, lenders look for a variety of types - credit cards, auto loans or perhaps a mortgage would be preferable to a history that consisted only of credit cards. A high number of recent applications for credit might suggest a “desperation” for cash, which will affect the report negatively.

By seeing how this figure is determined, consumers can more easily assess their own situations and take care to make sure that their record stays healthy. Clearly, a long track record of responsible, on-time payment of a variety of loans is the ticket to a healthy financial report.

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