Many transactions are based on a three-digit number assigned to you based on how you handle debt. That number is your FICO score. It is used to determine mortgage interest rates and car loan rates. It can also affect how much you pay for car insurance. It is important to know what each organization that uses the FICO score considers to be good credit.
FICO Score Ranges
Your FICO score will be a number somewhere between 300 and 850. The higher the number, the more creditworthy you are considered to be by potential creditors and the easier time you will have borrowing money. Your score can vary depending on a number of specific factors, such as if your debt payments are current, and your remaining available credit. Your score can also vary slightly by the day, since the information on your credit report can change daily.
Calculating a FICO Score
The criteria used to calculate your FICO score is a closely guarded secret. Computer software looks at multiple pieces of information in your credit report and assigns values, figuring your FICO score. Some of the elements used in this calculation are your payment history and the amount you owe on your accounts. These factors each figure into about 30 percent of your score. Length of credit history and new credit, as well as types of credit that you have in use make up the rest of the criteria used in the calculation.
Prime and Sub-prime Credit
The actual FICO number that marks the beginning of prime credit also varies depending on the type of loan that you are seeking. A FICO score of 720 or above is considered to be a prime score by most lenders, and people with this score or above don't have problems getting many different types of loans at the best rates. Scores between 620 and 720 are considered "B" grade credit. People with these scores still often qualify for a loan, but usually at slightly higher rates to reflect the increased risk. Credit below 620 will usually place you in the sub-prime category. Again, you can probably still get credit, but at a much higher rate of interest. These numbers may vary slightly as the economy changes.
Improving Your FICO Score
Since the interest you can save on a loan by moving from sub-prime to prime status can be substantial, it is worth it to try to increase your FICO score. Generally if you make good financial decisions over time, your score will increase. Try to keep your balances on your revolving debt at 30 percent of the credit limit or lower. FICO scores seem to be quite sensitive to this number. Pay all of your payments on time. And don't just apply for credit for the sake of applying. Too many of these applications will decrease your score.
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