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You may have perused several websites in which they are offering you the opportunity to find out what your credit score is. While the number is very important, many of you may want to know exactly what those numbers mean. Here is information to help you understand the genesis of FICO scores and their importance.The three credit reporting agencies – Equifax, Experian, and TransUnion, in conjunction with Fair Isaac Corporation – developed a scoring system in the early 1980s. Although in the beginning these three reporting agencies had different systems, today each of their scoring is equivalent to the others even though they may utilize a somewhat different calculation method.
The significance of the numbers primarily determines whether or not credit is offered. While the scores alone (which can range anywhere from 300 to 900) have no meaning per se, they do matter when individuals apply for loans and credit cards or purchase cars and home. For example, if you're seeking a mortgage, it's advantageous to have a score of 650 or higher. (Scores ranging from approximately 640 or lower generally indicate that an individual doesn't have a good track record of credit account payments.) Similarly, if you lease a car you'll have to meet with the company's financial office, which will check your current FICO score. This plays an important part in determining whether you can afford the lease payments. The higher the score, the better rate of interest you can obtain.
So what do the numbers really mean? They offer a 'snapshot' analysis of your credit history. It also implies that the credit reporting agencies have certain criteria to assess how well or badly you're maintaining your finances as related to loans and other credit accounts. They look at your payment history, how much outstanding debt you've incurred in relation to your current salary, how long you've maintained your credit cards in good standing, the number of inquiries that are indicated on your credit report, and how many credit cards are currently being used.
If you've recently requested your free credit reports as well as your credit score, you may have noticed that on the score sheet there are specific reasons why you've been graded accordingly by each agency. There's a long list of possible reasons; if you have a low score the pertinent reasons will be noted for you. But because none of the credit agencies will divulge how they specifically arrived at a particular score, it's important to ensure that you heed these basic tips:
- Pay your credit card bills on time.
- Try to keep the amount owed at 50% or below the total amount of credit given.
- Decline new applications received in the mail as they will produce new inquiries on your credit report.
- Do not close older accounts that you've had for years.
At a time when we are all concerned about the economy and rising prices for food, gas, and other necessities, it's incumbent upon us all to refrain from incurring more debt than we can comfortably handle. Paying down the debt that you have will go a long way toward keeping your FICO elevated – both now and in the future.
