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Larry King
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Credit, FICO, Ratios and Stuff
What is a FICO score?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 & Co. 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 borrower's 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. Credit scores analyze a borrower's credit history. The higher the FICO Score, the better the credit rating. Some of the negative factors that could impact a FICO score include bankruptcies, delinquencies or late payments on accounts, collections, too many credit lines with maximum available funds borrowed, and too little credit history (less than 5 credit lines in the past 2 years). Additionally, credit report inquiries can negatively impact FICO Scores which should be considered when authorizing someone to pull your credit report. Every time someone pulls a credit report your FICO score drops 8 to 20 points! The score is dynamic and is calculated at the time a credit file is accessed from the credit bureau. There is no way to "manually" adjust a score in the event that a piece of data in a credit file is inaccurate or not current (i.e. balance, lates, collections, etc.). There are really three FICO scores computed by data provided by each of the three bureaus Experian (formerly TRW), Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score. How can I increase my score?While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time. Pay your bills on time. Late payments and collections can have an impact on your score, and that can be serious. Apply for new credit sparingly. Shopping for credit can have an adverse affect on your score. Reduce your credit card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively. If you have limited credit, obtain additional credit. Paradoxically, not having sufficient credit can negatively impact your score. What if there is an error on my credit report?If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800), and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, your mortgage company may help you correct this problem as well. Debt-To-Income Ratio?How do I figure my Debt-To-Income Ratio?Debt-to-income ratio is expressed as a percentage. As a basic guideline, your total debt expense should be no greater than 36% of your monthly gross income. To calculate your debt-to-income ratio divide your monthly fixed expenses by your gross monthly income. Debt-to-Income Ratio = Monthly Fixed Expenses**, divided by, Gross Monthly Income **Includes: monthly housing expenses,
installment credit balances with more than 10 months remaining,
revolving credit with more than 10 months remaining, real estate
loan payments on non-income producing property or negative cash
flow on non-owner occupied property, alimony, child support or maintenance. This page last updated on 3/2009 |
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