Excerpted from “Understanding Your FICO Score” by Fair Isaac Corporation, available free online at www.myFICO.com
When you’re applying for credit–whether it’s a credit card, a car loan, a personal loan or a mortgage–lenders want to know your credit risk level. To help them understand your credit risk, most lenders will look at your FICO® score, the credit score created by Fair Isaac Corporation which is available from all three major credit reporting agencies.
A credit score is a number lenders use to help them decide: “If I give this person a loan or credit card, how likely is it that I will get paid back on time?” A score is an estimate of your credit risk based on a snapshot of your credit report at a particular point in time.
The most widely used credit scores are FICO scores. Lenders use FICO scores to help them make billions of credit decisions every year. Fair Isaac develops FICO scores based solely on information in consumer credit reports maintained at the credit reporting agencies.
Your credit score influences the credit that’s available to you, and the terms (interest rate, etc.) that lenders offer you. It’s a vital part of your credit health.
Understanding your FICO score can help you manage your credit health. By knowing how your credit risk is evaluated, you can take actions that will lower your credit risk – and thus raise your credit score – over time. A better FICO score means better financial options for you.
More information on FICO scores and credit scoring can be found online at www.myfico.com
Once you know how scoring works, you may want to take the next step by finding out what your FICO score is today, and what steps you could take to improve it.
You can get your FICO score through Fair Isaac’s myFICO® website. When you order your score through www.myFICO.com, you also get the credit report it’s based on, and specific tips on how to improve your score.
More credit is available. Lenders who use FICO scores can make more credit available to you or offer better terms because your FICO score gives them more precise information on which to base credit decisions. It allows lenders to identify individuals who are likely to perform well in the future, even though their credit report shows past problems.
Even if your FICO score is lower than a lender’s cutoff for “automatic approval,” you may still benefit from your lender’s use of FICO scores. Many lenders offer a choice of credit products geared to different risk levels. Most have their own separate guidelines, so if you are turned down by one lender, another may approve your loan.
Under the FACT Act amendment to the Fair Credit Reporting Act, you are entitled to one free credit report file in a 12-month period. To request this free annual disclosure, visit www.annualcreditreport.com to make an online request or download a mail request form, or simply call 1-877-322-8228.
The use of FICO scores gives lenders the confidence to offer credit to more people, because they have a better understanding of the risk they are taking on. And this gives you more options when you apply for credit.
Credit rates are lower overall. With more credit available, you may pay less. Automated credit processes, including credit scoring, make the credit granting process more efficient and less costly for lenders, who in turn have passed savings on to their customers. And by controlling credit losses by using FICO scores, lenders can make rates lower overall. Mortgage rates are lower in the United States than in Europe, for example, in part because of the information–including FICO scores–available to lenders here.
Your FICO score can change whenever your credit reports changes. But your score probably won’t change a lot from one month to the next. In a given three-month time period, only about one in four people has a 20-point change in their FICO score.
While a bankruptcy or late payments can lower your FICO score fast, improving your FICO score takes time. That’s why it’s a good idea to check your FICO score 6-12 months before applying for a big loan, so you have time to take action if needed. If you were actively working to improve your FICO score, you’d want to check it quarterly or even monthly to review changes.
H & R Mortgage wants you to know that you can download this booklet, “Understanding Your FICO Score” by Fair Isaac Corporation free online at www.myFICO.com.
Fair Isaac, FICO and myFICO are trademarks or registered trademarks of Fair Isaac Corporation in the United States and/or in other countries.
© 2000-2005 Fair Isaac Corporation. All right reserved. This information may be freely copied and distributed without modification.