Your FICO Score

One extremely important component in your overall credit worthiness package is your FICO score.  But what precisely is that and how does it influence your debt management choices?

FICO is an acronym took form from the letters of its founder, the Fair Isaac Corporation.  It is a number between 400 and 800 that rates credit worthiness based on a proprietary algorithm invented by the company, with 400 being worst and 800 being best.  Other companies now have their own variations.

Though the particulars of the algorithms are closely held trade secrets, over the decades a lot of people have reverse engineered some of the important factors.  Any late payments will lower your score; and the more of them and the later they are, the more heavily the score is affected.  The total amount of balance carried per month is another factor.  A less imperative part is the number of credit cards and credit checks performed.

Any score below about 620 is regarded marginal and below 580 is absolutely poor.  720 and above is very good to outstanding.  A range between 620 and 720 represents a kind of gray area, where items other than your FICO will have a more significant role in loan applications.

Banks, mortgage companies, credit card issuers and other lenders will utilize your FICO score as a very significant criterion for deciding whether to make a loan, and at what interest rate.  Other things being equal the higher your score the favorable interest rate you can have.

Of course, several times all other things are not equal.  Current interest rates in general, the present demand for loans, the general economy and other elements have a heavy influence on the enthusiasm of lenders to lend and at what rate.

Also, the whole lending industry has undergone at least two remarkable shifts in the past 20 years.  With the increasing use of computers and modern financial techniques, underwriting loans is done in a very different way today.  Also, not surprisingly, the Internet has changed finance to a very different mode of working.

Even with all these developments, though - or, perhaps in part because of them - the FICO score remains a primary instrument for lenders.  It may not establish the final decision, but it absolutely influences the ‘first cut’ when presented with a stack of applications to approve or disapprove.

Fortunately for those who have financially slipped, there are options.  Though your FICO may be low you nonetheless have a number of alternatives.  The first thing to do is set into motion a scheme to improve your score.

As you work to get rid of those outstanding overdue debts - either through paying them off or negotiating with the lender - your FICO will slowly improve.  The age of 30 day past due, 60 day past due (or longer) late payments is an issue in calculating your FICO.

At the same time, you can shop around for lenders ready to take a higher risk by lending you money.  The disadvantage is those loans almost always carry a bigger interest rate.  Your most effective approach is to try to give up borrowing for as long as possible while you work to recover your debt situation.  Your FICO will follow suit.