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Your FICO Credit Score: What it is and Why it is it so Important

By: Tom Kline

Credit scoring is a system lenders use to help determine whether to lend you money. The one most commonly used by lenders is FICO (named for Fair, Isaac, the company that created it). The number indicates to lenders how likely you are to make your payments on time by taking into account the number and type of accounts you have, any late payments in your history, collection actions, outstanding debt, and the age of your accounts.

Having a good FICO credit score promotes your financial health.
Your FICO credit score is computer-generated using numbers from your three credit reports. These are created by the three major credit bureaus: Equifax, Experian and TransUnion. You may have a different FICO credit score for each of your reports. Lenders may use any of those numbers, or take the middle of the three. The final number determines whether or not you qualify for a loan, or other credit, how much they are willing to lend you and at what interest rate. Over time, your credit score can save you (if itís high) or cost you (if itís low) thousands of dollars in interest.

How is your FICO credit score calculated?

1. Payment history. Itís 35% of your credit score. A history of late payments on several accounts causes more damage than late payments on a single account. If you run into problems, the best self help credit repair is on time bill payment.

2. Amounts owed. Are you maxing out your credit? 30% of your credit score is based on what you owe. Certain types of loans boost credit scoresófor example, paying down car loans. Owing a large amount on your credit card doesnít automatically translate into a lower credit score, but late or missed payments will.

3. Length of credit history. 15% of your credit score is determined by how long you've been using credit. Generally, older accounts equal higher scores, as they demonstrate responsibility in paying off debt.

4. New credit. Opening several accounts simultaneously lowers scores. However, you wonít be penalized for rate shopping (example: car loans) in a short timeframe.

5. Types of credit used. Using (or overusing) various credit lines impacts your score, as will the type of credit, such as a home equity line or credit cards. Paying down installment loans, say on a car or furniture, is a good sign that you are capable of managing and repaying debt.

Knowing how to improve your FICO credit score could save you a small fortune over your lifetime.
Whether youíre buying new or used cars, a house, or applying for any type of credit, your FICO credit score has a direct impact. The higher your score, the lower your interest rates will be; lower score, higher interest rates. See dramatic interest rate comparisons in Part 2: FICO credit score.

Information about the Author:

(c) 2006 RK Auto Group Tom Kline is Controller of RK Auto Group (http://RKAutoGroup.net: RK Buick, RK Chevrolet, RK Subaru: RK Subaru: RK Scion: RK Toyota). During his 15-year tenure Kline has worked in the Sales Department, Parts, Service and Body Shop, Leasing, Collections, and MIS.


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