A Closer Look at the FICO Score

It may be just a little number, but the ubiquitous FICO score has considerable influence on every consumer’s life in the United States and Canada. If you are in need of credit, housing, or a job, the higher your FICO number, the better will be your results. As a good part of your credit worthiness will be judged by this number, you need to be aware of how the FICO system operates and how you can improve your score.

Background of the FICO Score

The FICO score is the most well known and widely used credit score in the United States. It owes that honor to being the first one developed by two visionaries. Bill Fair, a mathematician, and Earl Isaac, an electrical engineer, created the FICO score to help department stores and banks evaluate the creditworthiness of their customers. Fair had been working on investigating mathematical techniques for predicting behavior, and thought they could be applied to the then cumbersome process of loan approvals.

When the first credit cards began to be used in the 1950s, granting credit was entirely a subjective transaction, depending on the personal judgments of the people involved. Credit was largely unavailable to large segments of the population because of biases based on age, marital status, sex, and ethnicity. In 1956, to overcome these barriers and make the process more streamlined, Fair and Isaac started a management consultant company with their new formula.

The scoring system was slow to catch on. The banking institutions were resistant, as they are not known to be acclimated to change. However, the advent of computers allowed credit applications to be fully automated and the flexibility proved to be an advantage to creditors who could now easily work with the score. The IRS boosted the use of the scoring system when they asked Fair and Isaac to devise a system to catch tax evaders which worked very well. Today, the scores of the Fair Isaac & Company, Inc. predominate in the credit world.

A Different FICO Score at Each Credit Bureau

Most people believe that they have only one FICO score, and that it is passed mysteriously around between creditors. In fact, every consumer with a credit card will most likely have a different score at each credit reporting bureau. The Fair Isaac Company only produces the software which is used by the credit reporting agencies to calculate a consumer’s credit score. As each bureau will vary in the information contained in a consumer’s credit file, the scores can be different at each bureau.

FICO Scores Change Monthly

Each consumer’s credit file must have at least one account which has been active in the last six months for a score to be computed monthly. New financial information is constantly added in most accounts due to the complex financial affairs of the average consumer today. Your credit score will be changing along with all the additional information being recorded. If you have been late with a payment, paid off a loan early, or filed for bankruptcy, etc., your credit score can move substantially.

Improving Your Score

For consumers who are trying to improve their credit scores, the following are helpful tips:

Check your credit report at each of the three credit reporting bureaus. In order to improve your score, you must know what is on your report. You can obtain a free report at each of the three bureaus every year. Visit website: www.annualcreditreport.com

Make timely payments on your accounts, as this is one of the biggest influences on improving your credit score. Late payments can lower your score considerably.

Reduce your credit balances. As your balances decline in relationship to your credit limits, your credit score will go up.

If you feel overwhelmed by your financial affairs, seek the help of a reputable financial counselor whose expertise can be invaluable and well worth the investment. Know your rights under the Fair Credit Reporting Act.

Take a proactive approach to your credit and identity.  Sign up for a credit monitoring service that offers monthly or annual FICO scores as well as daily social security number monitoring.  You will be alerted of changes on your credit reports or if suspicious activity is detected.  This is the first step for securing your identity from fraud.

References:

1. Funding Universe, Fair, Isaac and Company,  http://www.fundinguniverse.com/company-histories/Fair-Isaac-and-Company-Company-History.html2. My FICO, How to Repair Your Credit and Improve Your FICO Credit Score,http://www.myfico.com/crediteducation/improveyourscore.aspx

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The post A Closer Look at the FICO Score appeared first on SIF.org.

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