15 Feb Why Your FICO Score Is Important
By Claire Dwyer, First Marblehead
Your FICO score, named for the Fair Isaac Corporation that developed the equations used to derive it, is a numerical representation of your creditworthiness. In other words, it helps companies decide whether and how to do business with you based on your credit history. Your FICO score is tied to your social security number. That means it will follow you around for your entire life, and will change as your credit activity changes. The score affects many aspects of your life that you may not even realize, such as your access to money, your insurance and even your employment, as potential employers may access it when you apply for a job.
How it works:
If you want to borrow money, banks will use your credit score (in addition to other information) to determine whether they want to lend to you. Whether you want to buy a car, a house, get a credit card, pay for college or just need some money to cover some unexpected expenses, your FICO score will help determine whether you are approved for that loan. Because many banks use your FICO score, or a similar scoring model, being denied credit at one bank often means you’ll be denied at others.
Your FICO score also helps determine how much banks will charge you for borrowing money. If you have a high score, you might qualify for a lower interest rate than someone whose FICO score shows that they’re a little more risky. Keeping your score high is important so you don’t end up spending more money in the long run. For example, if you take out a 7 year car loan for $15,000, at a high interest rate with a low FICO score vs. a low interest rate with a high FICO score, you may end up paying thousands of dollars more for the car over the life of the loan! With a higher FICO score, you may be able to borrow money at a lower cost.
Keep in mind that your FICO score is used by more than just banks. Insurance companies use your credit score to help determine how much to charge you for car, mortgage and life insurance. Even if you plan to rent, and not buy a home or apartment, landlords routinely check your FICO score before deciding to rent a place to you. Many employers will even check your credit score before offering you a job.
Stay on top of your FICO score:
Problems on your credit report may stay there for seven to ten years or longer; that’s why it’s so important for you to keep paying your bills on time and not borrow more money than you can repay. Late payments, overborrowing, and similar actions can lower your score and make creditors avoid the risk of doing business with you, which you don’t want.
For more information on your FICO score and why it’s important, check out these resources: *
The Credit Reporting Agencies, Who Are The Players? (Via SmartCredit.com)
Credit Scoring, What Everyone Needs To Know (Via SmartCredit.com)
5 Little Known Facts About Credit Reporting and Credit Scoring (Via SmartCredit.com)
How Student Loans Impact Your Credit (via Mint.com)
* First Marblehead is not responsible for the content of these web sites.