FICO - Part 1 - What FICO Is

All of this information is taken from the official FICO website that can be found by visiting www.myFICO.com

Everything you do with your credit affects your FICO score. Different events affect your credit score in different ways, which we will be discussing in Part 2 of this entry. In this part I will explain why it is very important to have a great FICO score and what this score actually is.

FICO stands for the Fair Isaac Corporation, and was founded in 1956 by Bill Fair and Earl Isaac. They created this method of weighing risk when lending money as an unbiased way to do so. All three main consumer reporting agencies use FICO: Equifax, Experian and TransUnion. The reason that a good FICO score is needed is because it determines all terms of a loan, most importantly your interest rate. When you want to take out a mortgage, personal loan, car loan, etc the lender wants to know how much risk is involved when lending you the money. The more risky you seem, the higher your interest rates and payments. As discussed before, when your going to apply for a loan, it is a great idea to get your credit score as high as possible before contacting lenders.

Since we will be discussing what determines your credit score in Part 2, I'd like to take a moment to discuss what is not included in your FICO score.

These items are not determined in your credit score per myFICO.com:

-Your race, color, religion, national origin, sex and marital status.
US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
-Your age.
Other types of scores may consider your age, but FICO® scores don't.
-Your salary, occupation, title, employer, date employed or employment history.
Lenders may consider this information, however, as may other types of scores.
-Where you live.
-Any interest rate being charged on a particular credit card or other account.
-Any items reported as child/family support obligations or rental agreements.
-Certain types of inquiries (requests for your credit report).
The score does not count “consumer-initiated” inquiries – requests you have made for your credit report, in order to check it. It also does not count “promotional inquiries” – requests made by lenders in order to make you a “pre-approved” credit offer – or “administrative inquiries” – requests made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either.
-Any information not found in your credit report.
-Any information that is not proven to be predictive of future credit performance.
-Whether or not you are participating in a credit counseling of any kind.

The are many advantages to this system of rating risk using FICO. People can receive loans faster, almost instantaneously. Decisions are fairer because lenders can focus only on facts related to credit risk instead of their personal feelings. Credit 'mistakes' count for less in this ratings system. More credit is available, and gives a better overall score for the lenders. Rates are lower overall as well so payments are lower too.

FICO is a great tool that you can learn to control and get the best possible rates available to you. Stay tunes for the next post that will explain in more detail what affects your score, which are the most important parts of FICO.