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FICO Score — What You Need To Know

A FICO score determines if you can get a loan for a house, a car, or a personal line of credit from banks and other lending institutions. The statistically manipulated ranking called FICO score is a single time frame snapshot that determines credit worthiness in the eyes of a potential lender. Lenders rely on credit information collection companies to provide them with the credit information.

What exactly do FICO scores measure?

FICO scores consist of five basic parts that are given a percentage ranking.

These five parts are payment history, how much credit you have used, how long you have had credit, the kind of credit you have used, and recent credit applications and searches for credit.

A FICO score improves if you pay regularly and on time. Any late payments count against you and your chances of getting a loan. On time payments improve a FICO score. This part of the FICO score usually accounts for 35 percent of the overall FICO ranking.

About thirty percent of a FICO score is determined by how much credit you have used and the type of credit you have used. Having a high balance on credit cards or personal unsecured loans usually lowers this part of the FICO score. Applying for multiple credit cards in a short period of time also will lower this part of a FICO score.

How long you have had credit accounts for about 15 percent of a FICO score. The longer you have had credit with the same company (credit card, bank, or other lender) the better off this part of a FICO score will be. This is the major reason that older people have a better credit rating than younger people if all things else are equal.

The kind of credit you have used influences about 10 percent of a FICO score. Generally, a home loan or a car loan gives you a better credit worthiness in the eyes of potential lenders than credit cards or unsecured loans.

Recent credit applications account for about 10 percent of a FICO score. Applying for a lot of credit cards in a short period of time can lower this part of a credit rating. Many companies require a credit report on potential new hires. If you apply to several companies that run a credit check on you this part of a FICO score will drop.

Are FCIO scores 100% accurate?

Absolutely not. FICO scores are based on the reporting of three major credit rating companies. The information that these companies collect is often inaccurate and frequently does not even apply to you.

One example should illustrate the many failings of credit data collection information companies.

When Social Security first began in the 1940’s many people were registered by one name like Paul Jones instead of their full name like James Paul Jones. If your name is Paul Jones that person’s credit history and Social Security number will appear on a credit report and may make a FICO score go up or down.

FICO scores are a measure of your ability to get a loan. FICO scores are not infallible. You can challenge every error on a credit report that adversely affects a FICO score and have that item removed. The easiest way to have a high FICO score is to pay off all debt when it is due, pay off all credit card debt, and wait out the time it takes for a FICO score to improve.