The system to check the creditworthiness of an individual was developed more than 50 years ago by Fair Isaac Corporation and is known as FICO score. Through your FICO rating various banks and other institutions which lend money decide whether to forward credit to you or not, and at what rate. This credit score comes in very handy to the lenders when you are applying for a car loan or a home loan, for a credit card, or any other type of loans. The FICO score ranges from 300 to 850 and the higher score you have the better it is for you when seeking credit.
Your Credit Report
Through FICO scores, lenders are able to approve your loan applications very fast. It enables them to make fast decisions. Your FICO rating is based on your credit report. The score changes as and when there are changes in your credit report. Your report contains information such as:
·       The different types of credit you use
·       When were your accounts opened
·       Whether you have paid your bills on time
Your report contains many minor pieces of information that makes sense to the lending authorities when coming to any decision. The credit report also informs the banks and other lenders whether you are further seeking credit elsewhere.
Improving Your FICO Score
It is very easy for you to lower your FICO rating score but it takes time for you increase it to become creditworthy again. Late payments of your bills, or a missed credit payment, or a bankruptcy can lower your score fast. Once you decide to improve your score, it may take as long as 6 months to a year. If your score is low and you intend to go for a big loan, start working on increasing your FICOÂ rating from about a year in advance.
Your credit report contains details of all your creditors, along with the loan amount, the current balance, and your payment history, among others. If you have not paid an installment on your loan, it appears in your report and any future lender can see it. Start paying your bills in time and ensure that you do not miss any credit payments. While doing so check your score every 3 months or so. The higher your FICO score is the less risky your lenders will consider you.
There are three types of FICO scores, one each from the three main credit bureaus – Experian, TransUnion, and Equifax. There may be minor variations in the scores from the three agencies as their sources of information may be different. Your loan processor may check your credit rating from any one of these bureaus and it may be advisable that you do the same. This is to ensure that all the three are accurate.
45% of Americans have a FICO score of between 700 and 799, whereas 13% have a score in excess of 800. With time and effort you too can increase your FICO score to what more that half of your compatriots have achieved.
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