If you’ve ever been in debt you’ve probably heard the term “FICO score” but you probably don’t know what it is. So, what is a FICO score?

In the 1950s, Fair Issac & Co. (FICO) created a scoring method that would help creditors determine the likelihood that a certain user would pay their bills, based on a number of factors, mostly a borrower’s credit history.

Calculating these scores is pretty complex, from what I can tell. The people who continually develop these models study the histories of thousands — if not millions — of people who have used credit. They find factors that can help predict the future of a borrower based on several factors.

A great rule of thumb for predicting your FICO score is to use paying the monthly minimum as a medium. Late payments, collections, or settlements would have a negative impact on your score, while paying on time, full repayments, and credit increases would have a positive impact on your score.

While it’s nice to have a good rule of thumb, your FICO score is determined by many other factors. The current formula is, in fact, protected as a trade secret (which the FTC ruled was acceptable), but there are many things that are known to be used in the score, including:

  • The number of late payments
  • The pattern of late payments (ie: paying off your debt only when you get a final notice)
  • The amount of time credit has been established
  • The amount of credit that has been established
  • The amount of credit used versus the amount available
  • Length of time at your current residence
  • Length of time at your previous residence
  • Number of credit queries
  • Negative information (bankruptcies, collections, etc.)

While your FICO score is important, you must remember that it is only a number based on a mathematical model. Most lending institutions use your FICO score as only one factor in determining if they will offer you credit.

Also, keep in mind that as with many businesses, lending institutions target many different markets. Some lenders will approve only the elite of credit scores, while others will target people who have had serious credit problems.

If you cannot get approved at one lender you may wish to try another lender who targets people with a lower credit score. You may end up with a higher interest rate.

Hey, not all of us can have an American Express Centurion card 😉

[tags]credit, history, fico, score, debt[/tags]