If You Understand Your Credit Rating, You Can Improve It.

If you have never been in the market for a car or a house, you probably don't realize what a FICO score is. But if you are, it is probably something you think about all of the time.

What is this thing called FICO? That part is simple: it stands for the initials of the company, Fair Isaac and Company. This company uses a proprietary method to calculate a number, or "score" for any consumer to determine if he will be a good risk for a lender.

Borrowers may talk about this as their credit score, their credit rating or just their credit. But they all refer tothe same concept: the idea that lenders want to know whether you would be a good risk for a loan.

The way that they find this out is by using companies that compile as much financial data about consumers that they can. The main credit agencies that banks and other lenders utilize are Equifiax, TransUnion and Experian.

They each weigh this information slightly differently, so the average of their weightings are used by Fair Isaac; higher weights given to certain parts of the score to arrive at the crucial credit score number.

The information used is information that looks at how the potential borrower has behaved in his credit dealings in the past. Each time you open a credit card account, a store credit, open an account with an electric company or a telephone company, take out an automobile loan or a mortgage, and in some cases, rent an apartment or home, the total of your transactions with each company is recorded. The credit agencies take the information and weigh it to get a score.

The higher this rating, the higher your credit rating, and then the more likely you will be able to obtain the loan you are applying for. FICO scores are given a range from 300 to 850.

All of a consumer's transactions with debtors is listed on this report, and will show the average time to pay bills, size of credit lines, etc. The credit agencies take all this information from all of these entities and create a file on each consumer.

For illustration purposes, let's suppose that every consumer starts out with the best score of 850. A late payment or a default or high credit balances would immediately reduce it by a certain amount. Every record of such a credit problem would result in a score that is lower and lower. Enough of these kinds of situations, and your score may be brought down so low, under 400, as an example, that no bank would consider you a good risk.

Obviously, lenders believe that if you paid your other creditors late, or not at all, you will be willing to do the same with them.

A few such issues may not harm you too much, and you will still be able to obtain a loan. Too many, however, and the new lender is going to see you as a customer who is consistently irresponsible in his credit obligations and will not want to take such a risk.
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