Understanding Your FICO Score

Few numbers are more important to an individual's financial well being, than the FICO score. FICO was developed by Fair Isaac Corp. and is basically a three-digit number that represents an individual's credit-worthiness. The score is based on a person's credit history and is used widely by lenders in the U.S. to evaluate credit risk. FICO credit scores ranges from 300 to 850, with 720 considered the median score. Generally, FICO scores of above 720 are considered "Good" or "Excellent" while scores below 600 are considered "Poor".

An individual's FICO score can determine his or her eligibility to secure a home loan, an automobile loan or a consumer loan. It also directly affects the interest rates associated with such financing. Typically, the lower the score, the harder it becomes to get a loan, and the higher the interest rates become. For instance, it is not unusual for people with FICO scores of less than 650, to pay hundreds or even thousands of dollars more on interest rates annually, than a person with a score of 750 would pay for the same loan amount.

FICO scores are calculated using a fairly complex mathematical algorithm that combines data from various sources. One of the most important factors affecting an individual's FICO score is the punctuality with which payments are made. Late or missed payments can negatively impact FICO scores in a substantial manner while a history of prompt payments can boost it significantly. Another key factor is the ratio of debt, to the total amount of available credit. Generally speaking, the closer that an individual gets to maxing out his or her credit, the higher than likelihood that FICO scores will get negatively affected.

Other important influencers of the FICO score include the length of an individual's payment history, the number of open accounts, and the number of credit inquiries and credit checks. In most cases, individuals need to have at least one credit account open and active for at least six months before a FICO score is calculated. In many cases though lenders require borrowers to have at least one year's worth of credit history in order to extend loans.