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The Three-Digit Number That Controls Most Of Your Life

May 10, 2008
Some people will tell you there are three little words that can completely change their world. While "I love you" may be the most emotional phrase in the English language that will cause people to do things they wouldn't do otherwise; there is a three digit number that contains amazing power over our lives.

This three digit number is a number that is calculated based on a complicated formula, and can change every thirty days or so. Your FICO credit score is the most used number by lenders who are determining whether or not an individual is worthy of some type of credit - whether they're applying for a car loan, credit cards, or mortgage. In fact, more than 80% of financial institutions rely on the FICO score when evaluating applicants, and over 75% of mortgage lenders use the score.

Your FICO Credit Score is Between 300 and 850

What's the purpose of having this three digit number, when lenders could browse your credit reports which contains a more complete representation of your credit history? It's sort of giving permission to lenders to be a little lazy. The three digit credit score gives them a way to avoid reading over your entire credit report, to see how many times you've paid late, how much money you owe, and how much credit you have available to you already. This information is tied into your credit score, so most lenders can decide your credit worthiness based on the FICO score. Saves them a lot of time. The higher a person's FICO score, the lower the risk for not paying what they owe.

With a FICO score of 720 or higher, there is really no reason to work to raise your score. Everyone with a score of 720 to 850 are in the same group in the eyes of lenders. You've got excellent credit and should get the best interest rates, and approved for most credit requests.

Anyone whose FICO score is below a 720 should spend time trying to improve their score, since they are in a higher risk pool according to most lenders. Lower credit scores pay higher interest rates when they are approved for credit; and are often denied when applying for credit applications.

How the FICO Score is Calculated

The actual formula is a bit of a mystery - although all consumers have a right to know what financial situations are used in determining the credit score. Here is the breakdown of your credit score:

10% - Types of Credit You Have. A small portion of your credit score reflects your mix of existing credit. Do you have credit cards, mortgages, car and personal loans and retail accounts?

10%- Number of New Accounts. If you have a high number of new accounts opened in a short period of time, you are showing signs of desperation. Opening several new accounts in a short period of time will lower your score, as will multiple inquiries during a short period of time. (unless the inquiries are made within a 14-day period, and are all for the same type of credit- for a car loan or a mortgage for example).

15% - How Long You've Had Credit. The longer you've had credit and made payments on the credit the better your score. Your score consists of the oldest account, and the average age of all your accounts and calculates part of your score based on this information.

30% - How Much You Owe. This is a big part of your score calculation. The score considers how much money you owe relative to the total amount of credit you have available to you. If you are close or maxed out on all of your credit, you are in a higher risk pool than someone who has tens of thousands of dollars of credit available to them but is only using $2,000 of their available credit.

35% - How You Pay Your Accounts. The largest factor in calculating your credit score is based on how you've paid your accounts. If you've always paid your payments on time, you'll have a higher score than someone who has missed payments frequently.
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