What is a FICO Score & How It Works?

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. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.
Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.
Credit scores analyze a borrower's credit history considering numerous factors such as:
Late payments
The amount of time credit has been established
The amount of credit used versus the amount of credit available
Length of time at present residence
Employment history
Negative credit information such as bankruptcies, charge-offs, collections, etc.

When you apply for credit – whether for a credit card, a car loan, or a mortgage – lenders    want to know what risk they’d take by loaning money to you.
FICO scores are the credit scores most lenders use to determine your credit risk. You have    three FICO scores, one for each of the three credit bureaus – Experian, TransUnion, and    Equifax. Each score is based on information the credit bureau keeps on file about you. As this    information changes, your credit scores tend to change as well.
Your 3 FICO scores affect both how much and what loan terms (interest rate, etc.) lenders    will offer you at any given time.
Taking steps to improve your FICO scores can help you qualify for better rates from lenders.

Your credit report

Details about your financial behavior and identification information are contained in your personal credit report. This consumer-friendly report is sometimes called a credit file or a credit history. A copy of your credit report makes it easy for you to understand the information a lender would be seeing if they review your credit history. The typical consumer credit report includes four types of information.

By law, we cannot disclose certain medical information (relating to physical, mental, or behavioral health or condition). Although we do not generally collect such information, it could appear in the name of a data furnisher (i.e., "Cancer Center") that reports your payment history to us. If so, those names display in your report, but in reports to others they display only as medical payment data. Consumer statements included on your report at your request that contain medical information are disclosed to others.

Public record information in some states may also include overdue child support. Bankruptcy information can remain on your credit report up to 10 years; unpaid tax liens can remain for up to 15 years; other public record information can remain up to seven years.
Credit information includes specific account information, such as the date opened, credit limit or loan amount, balance and monthly payment and payment pattern. The report also states whether anyone besides you (a joint account holder or cosigner, for example) is responsible for paying the account. Active positive credit information may remain on your report indefinitely, while most negative information remains up to seven years.

Requests by others to view your credit history will show you who has received information from your credit report and who was given your name during the recent past, as allowed by law. According to the Fair Credit Reporting Act, credit grantors with a permissible purpose may inquire about your credit information without your prior consent. This section includes the date of the inquiry and how long the inquiry will remain on your report.

On your personal credit report, information about those who inquired for the purposes of extending a pre-approved credit offer are included for your information. These inquiries are not revealed to creditors and do not impact your ability to obtain credit.

Personal information can include your name, current and previous addresses, telephone number, reported variations of your Social Security number, date of birth and current and previous employers.

"Statements of dispute" also may be added by you or your creditors. Creditors report temporary dispute statements when you challenge an account's status with them. The statement is no longer reported when the dispute is resolved, usually within 30 days.

If you and your creditor cannot agree on an account's status, you may have a statement added to your credit history. The statement will remain for seven years. Because the Fair Credit Reporting Act (FCRA) requires that we add statements at the consumer's request, we cannot mask medical information contained in a statement. Statements display to anyone who reviews your information so it may not be in your best interest to share your medical information in a statement.

Your credit report does not contain – and does not collect – data about race, religious preference, medical history, personal lifestyle, political preference, friends, criminal record or any other information unrelated to credit. Nor is there information about your checking or savings accounts.

Check your credit report

Whenever you apply for a new credit card, loan or extension of credit, the potential lender will most likely review your credit report before making a decision. You should too! Check it several weeks or even months prior to making a large credit purchase.

Get an easy-to-read summary of your credit accounts and total debt – both existing balances    and available limits.
Budget and plan for the future.
Assure the accuracy of the information reported about your credit. This is especially important    when you're getting ready to buy an expensive item such as a car or new home.
   If you haven't reviewed your credit report recently, get a copy of your credit report and score    delivered to you at the following websites:

www.experian.com
www.equifax.com
www.transunion.com

Correcting errors on your report

Federal law allows consumers to challenge inaccuracies and correct credit files, and it also encourages consumers to dispute incorrect data. There is no fee. If you believe there is an error on your report, write or go online to the above website for fast resolution. They will verify your dispute with the source of the data and you will receive a response within 30 days. Once verified, Experian, Trans Union, and Equifax will send you the results of their investigation.

Improve your credit

Your credit report shows how well you managed your financial responsibilities during a certain period of time. Negative information drops off over time, but the positive information remains. To create a positive credit history:

Print clearly when applying for credit.
Consistently use your complete name. Providing complete, accurate and consistent    identification on your credit applications helps set up your credit history correctly from the    beginning. It also minimizes the chance that your credit file will be incomplete or mixed with    another consumer's file.
Pay your bills on time. Most lenders look at the most recent information on a report. So if    you've paid your accounts on time for the last two to three years, the lender may weigh that    more heavily than a series of late payments from five years ago.
Set up a budget, and live within it. In the age of self-help and empowerment, managing your    finances should top your list.
Review your credit report 60 to 90 days before making a major purchase (such as a home or    car).

Getting help

If you begin to fall behind on your payments:
Contact your lenders. Ignoring the situation will only add to your problems. Many lenders will    work with you to set up a different payment schedule or interest rate. It never hurts to ask.
Pay your bills when they're due. If you have an overdue bill, unpaid debt, tax lien or judgment,    pay it off. You may find it easier to pay one affordable consolidating loan rather than several    separate accounts.
Stop using credit until your finances are under control.
Look to professionals if you need assistance or if you don't have time to develop your own    plan. Quality nonprofit credit counseling organizations help consumers understand credit    reports, contact creditors, manage debt and set up budgets. You might also find credit    management help at your local community college or community center.

Be an educated consumer

Going to a credit repair clinic will not be of help to you. There is nothing any credit repair clinic can legally do for you – including removing inaccurate credit information – that you can't do for yourself for free, and their fees can be substantial, ranging from hundreds to thousands of dollars.
The Credit Repair Organization Act is a federal law that prohibits credit repair clinics from taking a consumer's money until they have fully completed the services they promised. It also requires such firms to provide consumers with a written contract stating all the services to be provided and the terms and conditions of payment. Consumers also have three days to withdraw from the contract.

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