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I don't intend to make the work of Fair, Isaac and Company, the credit scoring company seem sinister, but the method by which they keep score is still a well guarded secret. Since the inception of their FICO scoring system, this California company has become the major source for lenders and insurers who have a need to determine your creditworthiness. The sell point for these institutions is the relationship between low credit scores and high risk. For mortgage companies, it will determine the rate that is available. For insurance companies, it determines whether you are worth the risk, and if so, how much of a premium you will pay.
The formula is still a mystery but the score can be had for a price.
So what does this mean to you as a applicant? More than you think. Many companies deny making these scores the sole criteria for their lending practices, but it does provide a wake-up call for those that want the best interest rates and the lowest insurance premiums.
The company does have guidelines for the consumer to follow and they are mostly based on good credit sense. The score is broken down into several categories:
Of course the best advice here is get current and stay current. The company gives no indication of how a perfect score is achieved in this category, but definitely, good common sense with creditors will help you score higher. If you are having credit difficulties, you need to resolve them prior to applying for a loan or for less expensive insurance.
The amount you owe provides another mixed picture. The ability to get credit and pay it down will provide a higher score than paying off credit cards in full each month. Any balance owed is taken into consideration, as well as how much credit is available and whether you have used it all. Seems the best method to core higher in this category, which is worth 30% of your score is to maintain no more than three credit cards with low balances (and regular payments to those balances). Numerous credit cards will lower scores. The balance game, played by some many people, will often backfire when you are scored in this category. The balance game is simply a shift from one card to another in an attempt to get low introductory rates at another card. This leaves too many cards open for scrutiny.
Credit history is all about management. If you are young, opening numerous accounts will drop your score in this category. Older folks need only keep their credit lives in order, accounts to a minimum, and your credit management within your means. This category nets a 15% share of your total score.
 It is almost impossible to avoid the offer of credit. Some of us will ruin our credit in college before we even have a chance to establish any. A little prudence and opening credit cards are are not bad things according to the FICO people. Your score is more a result of too much too soon. Establishing credit is good. Taking every offer that comes your way is bad. If you already have screwed yourself up in this category, only time will raise your score. The rush to bankruptcy will lengthen your time frame for good score recovery. Each time you apply for a card, a report is generated. Each of these reports can have a negative effect on your overall score. Keep in mind that checking your own credit report, which is something you should do periodically, especially in these times of identity theft, is not scored against you. But each lender and the time frames between those inquiries are scored. The bad part about the type of credit you use is that is often too easy to pass up a new credit card. This is something I have stopped doing. I have found myself in a department store with a sizable purchase and the clerk will offer me 10%, sometimes more, off on the purchase... if I open an account. Enough of these missteps, even if you never visit the store again, will add up to a lower score. When you do check your report, and FICO will let you do this for fee, you should close any accounts that you will never use. Sounds simple but some cards just won't close. Be persistent. But closing an account doesn't make it disappear from your credit report and that can and will alter your score. Fico will reports to the lender any problems that they find and will include a list of what they call score codes. These codes list problems that the lender can point to when the customer is denied or otherwise forced to pay a higher rate.
So what do you do? There are numerous credit agencies that offer reports. Nine dollars will get you a full report from Equifax, TransUnion, or Experian. There are free reports available from eLoan.com. You should take the time to read the Fair Credit Act. The idea of full disclosure of the credit scoring process isn't even being considered at the current time. Consumer advocate group have argued for this to no avail. It is best, and granted this is only information culled from a variety of sources, to keep your credit card ownership to a minimum, keep balances low (at least below 25% of the credit limit) and do your best to fix any credit issues before you begin to search for funds to borrow or insurance. To see how you credit score can effect you loan and insurance rates, you need only click here Back to our Mortgage Guide
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