With the advancements in the field of computers and internet technology, hassle-free financial transactions have become a reality. Thanks to the internet, an individual is neither required to step out of the house nor have to stand in long lines inside the bank so as to check account balances or trade a stock. Beyond these, there are numerous advantages of using internet technology. One such advancement that has tremendously influenced the personal finance sector is the concept of FICO scores or credit scores.
What exactly is a credit score? A credit score can be rightly described as a number that represents or indicates whether a person has the ability to manage his/her finances or not. Credit scores have significant effect on almost every lending decision. Although there are different ways of determining credit scores, the most universally followed approach is the one that has been developed by Fair, Isaac and Co. In this system, the credit scores of an individual are reported in the form of FICO scores and are normally present in the range of 300 to 850. Higher the credit score of an individual better is his/her credit worthiness in the market. Also, higher FICO scores suggest that the individual is well-versed with his/her financial management. Getting scores greater than 800 is almost impossible for anybody. Hence, one can feel assured if the scores are anything higher than 660.
There are certain criteria that are considered while calculating the FICO score of an individual. Some of these include
- 1.Past Payment History: This includes whether the individual has any past history of delinquency or has ever failed to make payments in the past or not. Higher number of failed payments in the past greater is the chance of repeating the same in the future.
- 2.Type and amount of credit: Another criterion is the amount of credit an individual owes and also the type of credit. Individuals who had reached close to their maximum limit on their credit card are considered as less credit worthy. Also, individuals depending entirely on their secured credit cards are also considered as risky in comparison to those with revolving payments on their loans.
- 3.Age of the credit: Also, persons with longer credit age are favored in the Fair Isaac system.
- 4.Under the Fair Isaac system, higher credit requests are considered as negative. In this system, individuals are considered risky when they apply for a greater number of credit cards, loans and other type of debt instruments within a very short period of time.
Each one of these criteria is given certain points based on their fulfillment. All these points are included in a formula and the FICO scores are determined. The credit scoring formula developed by Fair Isaac Corp is used by all the three major credit reporting bureaus in U.S including Equifax, TransUnion and Experian. However, the fact is that the scores provided all these bureaus with respect to an individual are not the same. The reason behind this is that all these three credit-reporting agencies may or may not receive the same information. Hence, it is important to get the FICO scores from all these three agencies whenever anybody wants to evaluate his/her personal credit ratings.
FICO scores are relative numbers calculated on the basis of certain factors. The entire objective of a FICO score is to determine whether or not an individual has the capacity and the required intention to pay back the credit. Many tend to consider a FICO score as a simple number. However, an important factor that one should remember is that if these scores are not maintained properly, one might end up losing hundreds or thousands of dollars by paying extra for home loans, car payments, credit cards or other utility bills.