What is a FICO score?

Credit scoring is a method of determining the likelihood that credit users will re-pay their loans. A FICO score is a credit score developed by Fair Isaac & Co, which 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, and 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 bits information which best predict future credit performance. Developing these models involves studying how thousands, and even millions, of people have used credit. Score-model developers find predictive factors in the data that have been proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.

Credit scores analyze a borrower’s credit history considering numerous factors such as:
· Late payments
· The amount of time credit has been established
· The amount of credit used versus the amount of credit available
· Length of time at present residence
· Negative credit information such as bankruptcies, charge-offs, collections, etc.

There are actually three FICO scores computed by data provided to each of the three credit bureaus––Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score.

Some Credit-Scoring Myths. There’s a lot of misinformation out there about what does and does not hurt your credit score.
Myth 1. Closing accounts can help your credit score. Closing accounts can never help your credit score, and in fact may hurt it. Part of your credit score is based upon your available credit and how much of it you are using. Closing accounts lowers your total available credit, which in turn makes your “balance due” a larger percentage of your credit limit.
Myth 2. Checking your Fico Score can hurt your credit. Applying for new credit is what hurts your score. Ordering copy of your own credit report or score does not. When you shop for a loan, you should do so in a fairly short period of time. The FICO score treats multiple inquiries within a 14 day period as just one inquiry.
Myth 3. Your FICO isn’t the only score you need to check. In reality, all three of the bureaus offer FICO credit scores using the formula developed by Fair Issac, but they each give the scores a different name.

Did you know -you can get a free credit report from all three major credit reporting bureaus? Just log onto www.annualcreditreport.com and follow the simple instructions.

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