Your FICO(tm) score is your most important number when it comes to using debt and credit to create wealth. What's yours? Let us show you how to get and maintain the highest credit score possible; and what to avoid if you're trying to raise your score.
Understanding Your Credit Score:
What does your credit score mean?
The
FICO (Fair Isaac Corporation) score is the most commonly used
method of computing your Credit Score. Their rating systems/algorithms
are used by over 90% of lending institutions as well as most insurance
companies and investigation companies. FICO has created an independent rating system for each of
the three national credit bureaus. These rating systems are meant to
develop a snapshot of the risk you
currently represent to the company purchasing the information. Several
parameters in your credit
file, including length of credit history, number of open accounts,
loans, mortgages, public records, and others are formulated to produce
a three-digit score between about 300 and 850. There are other scores
used by lenders and insurance companies (some of which are developed by
FICO) such as Application and Behavior scores. These other scores take different information into account. Usually a company will use a
combination
of your credit score with other factors when determining your risk.
They all have the same objective, which is to make an assessment of the
level of risk they will have when doing business with you. Regardless of
whether the score was generated by FICO or a system
based on FICO parameters, they all yield an industry standard
three-digit score. This score places the borrower in one of three main
categories. (Ok, so the third one isn't really a category, but it
probably should be...we named it ourselves.)
Prime, sub-prime, and toasted
Prime - If your credit score is above 680, you are considered a
"prime borrower" and will have no problem getting a good interest rate
on your home loan, car loan, or credit card.
Sub-Prime - If your credit score is below 680, you are "sub prime", and will likely pay a much higher interest rate on your loan.
Toasted- Below 560 is the "your toast" score. At least that is how
most lenders and credit issuers perceive it. You can still get a credit
card but you will likely be hit with a security deposit or high
acquisition fee. In addition to that your interest rate will likely be
well above 20%. You can forget about most home loans and the majority of new
car loans at this score. Below 560 is no place to be. You will pay
much, much more because of higher interest and unnecessary fees. You may even
pay more for your insurance rates. A very low score can even prevent
you from getting a job with many companies. If you're in this category
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