FICO is an acronym formed from the letters of its founder, the Fair Isaac Corporation. It is a number between 400 and 800 that ranks credit worthiness according to a proprietary algorithm invented by the company, with 400 being worst and 800 being best. Other companies now have their own variations.

Though the details of the algorithms are closely held trade secrets, over the decades many people have reverse engineered several of the important factors. Any late payments will lower your score, and the more of them and the later they are, the more heavily the score is affected. The total amount of debt carried per month is another element. A less important factor is the number of credit cards and credit checks performed.

Any score below about 620 is considered marginal and below 580 is decidedly poor. 720 and above is very good to excellent. A range between 620 and 720 represents a kind of gray area, where items other than your FICO will play a more significant role in loan decisions.

Banks, mortgage companies, credit card issuers and other lenders will use your FICO score as a very important criteria for deciding whether to make a loan, and at what interest rate. Other things being equal the higher your score the better interest rate you can obtain.

Of course, many times all other things are not equal. Prevailing interest rates in general, the current demand for loans, the general economy and other factors have a heavy influence on the willingness of lenders to lend and at what rate.

Also, the entire lending industry has undergone at least two significant shifts in the last 20 years. With the increasing use of computers and modern financial techniques, underwriting loans is done very differently today. Also, not surprisingly, the Internet has shifted finance to a very different mode of working.

Even with all these changes, though – or, perhaps in part because of them – the FICO score remains a primary tool for lenders. It may not determine the final decision, but it definitely influences the ‘first cut’ when presented with a stack of applications to approve or disapprove.

Fortunately for those who have financially slipped, there are alternatives. Though your FICO may be low you nonetheless have several options. The first thing to do is set into motion a plan to improve your score.

As you work to remove those outstanding overdue debts – either through paying them off or negotiating with the lender – your FICO will gradually improve. The age of 30 day past due, 60 day past due (or longer) late payments is a factor in calculating your FICO.

At the same time, you can shop around for lenders willing to take a higher risk by lending you money. The downside is those loans almost always carry a higher interest rate. Your best approach is to try to forego borrowing for as long as possible while you work to improve your debt situation. Your FICO will follow suit.

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1. Your FICO Score and What It Means for Repairing your Credit
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3. Tips on Interpreting your Credit Report

Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have 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, employment history and negative credit information such as bankruptcies, charge-offs, collections, etc.

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

It is possible to increase your FICO score, although it can be difficult to do in the short-term.  Some ways to increase your FICO score include; Pay your bills on time. Late payments and collections can have a serious impact on your score.   Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.   Reduce your credit-card balances. If you are “maxed” out on your credit cards, this will affect your credit score negatively. If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score. 

Additionally, since the method used to calculate the credit score is essentially just a complicated formula, one can change the score by causing changes in the variables that are important factors in the equation. There are several approaches that are used in calculating the credit score.  These approaches include:

Credit Counseling: Various credit counsling organizations exist. Their services are often free of charge. Mortgage professionals caution that using a credit counseling service will negatively affect your ability to obtain a mortgage. In fact, many mortgage lenders consider credit counseling as bad as a bankruptcy. 

Credit repair: Many for-fee credit repair organizations also exist. These organizations employ less standard solutions. Many websites recommend against using credit-repair organizations, claiming that their tactics are illegal. A typical example of an illegal credit repair approach is to obtain an Employee Identification Number (EIN) and use this when applying for a credit (it is the same length as a Social Security Number and is tied to your name in the same way). This is illegal, however, and a blank credit report might look just as bad as one with a derogatory item on it. Some credit repair organizations claim immense improvements in scores in very short periods of time. Costs may be high and results are not usually guaranteed.  

You can also try and repair your credit yourself.  Though professionals may have useful advice, there are a number of ways to improve your FICO score.  Because the exact formula is not known, the following suggestions are not guarantees, but nevertheless are likely to result in a higher (better) score:  Check credit reports for accuracy. The first strategy to pursue in improving a FICO score is recommended by every credit repair organization and credit bureau.  Also, make sure that you are on time with paying your bills.It goes without saying that punctuality will improve your FICO score. Punctuality will not help in the short term, but over the course of a year, paying bills on time will increase your score by roughly 30 points, and, more importantly, will prevent your score from dropping.  You can also negotiate with collectors and businesses to remove any late payments or collections from a credit report. Often, collectors will happily remove notices off a credit report in exchange for prompt payment. It is important for consumers to obtain any agreement in writing, as once collectors have been paid off it is mostly impossible to have statements removed.

Related posts:

1. How Do You Score? What the Credit Score Thing Really Means
2. Debt Handling: FICO, What is That?
3. Six Ways to Raise your Credit Score