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A high FICO score improves chances of getting credit

April 07, 2006|by Lynn F. Little

Whether you are seeking a home or car loan, phone service or new credit cards, most creditors look at credit scores, or FICO scores, to determine their risk. Ranging from 300 to 850 points, FICO scores are calculated using a mathematical model that assigns points for different pieces of information that predict the way you will handle credit.

What is FICO? A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Credit scoring began in the late 1950s, and FICO scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrower's credit history into a single number. Credit scores are calculated by assigning points for different pieces of information that best predict future credit performance.

Credit scores analyze a borrower's credit history using factors such as: payment history, including late payments; the length of credit history; the amount of credit owed versus the amount of credit available; new credit established; types of credit used; and negative credit information such as bankruptcies, charge-offs, collections, etc.

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Lenders might look at other criteria such as address, salary and employment history, but these factors are not part of the FICO score.

Financial activities determine FICO scores, and low FICO scores mean high out-of-pocket costs. Not paying your bills on time can cost you more than a few simple late fees. Making late payments is one of many financial actions that can lower your credit scores, which can make borrowing money more expensive.

The higher your FICO scores are, the less you pay when you buy on credit. For example, the difference in payments on a $150,000, 30-year, fixed-rate mortgage could be as much as $155 per month, depending on your credit rating.

While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time:

· Pay your bills on time. Late payments and collections can have a serious impact on your score. Be sure to stay current on all your accounts.

· Do not apply for credit frequently. Apply only for those accounts you need. Having a large number of inquiries on your credit report can worsen your score.

· Reduce your credit-card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively.

· Pay off debt rather than moving it to another lender. Contact your lenders or a legitimate credit counselor if you are having trouble paying your bills.

· If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.

Everyone has three separate FICO scores, one from each of the major credit bureaus: Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders might use the middle score. To determine your credit rating, check your scores by contacting the three credit bureaus directly:

· Experian - 1-888-397-3742, www.experian.com

· TransUnion - 1-800-888-4213, www.transunion.com

· Equifax - 1-800-685-1111, www.equifax.com

If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, your lender may help you correct this problem as well.




Lynn F. Little is a family and consumer sciences educator with Maryland Cooperative Extension in Washington County.

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