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sabrinamariUnderstanding your FICO is an important skill in everyone's life. If you're not sure exactly what FICO means, read on for a quick explanation.
FICO stands for ‘Fair Isaac Corporation’. A FICO score is an attempt to take the human, subjective factor out of credit decisions. Instead of actually *looking* at your credit reports, companies today usually depend on the Fair Isaac Corporation mathematical formula---your FICO score---to estimate how risky it is to do business with you.
There are three different companies that compile your credit reports and create credit scores for you: Equifax, Experian and TransUnion. Each company uses a silightly different formula. Of the three, your Equifax report and score are probably the most widely used, because Equifax uses the famous FICO formula, while the others each have their own variations on it.
All the formulas rate your score on a scale that runs from 300-400 at the low end to 850-925 on the high end. Here, we’ll concentrate on the original FICO score, since that’s the score used most often. Your FICO can theoretically range from 300 to 850.
300 is a very low and very rare score. Declaring bankruptcy, for example, puts you at about the 400-450 range. 850 is the top of curve---no one gets a score of 850 except maybe Bill Gates. :) The higher your score, the better conditions you will be offered on the money that you borrow.
BUT....and this is important---your FICO can also affect how much you pay for insurance, whether or not you get a job, and whether you are allowed to rent an apartment. We’ll talk about this in a minute. Your FICO also makes a HUGE difference in how much you pay every month when you buy a house or a car.
If your score is at the top of the range, you will pay MUCH LESS. If it’s in the middle or at the bottom, you will pay MUCH MORE:
Here’s an example. You can see more examples (including car loan and 15-year home equity loan examples) on this page:
http://www.myfico.com
For a 30-year fixed mortgage...
If your score is great---760-850---you will be charged 5.931% interest on a $300,000 loan. You will pay about $1,785 a month.
If your score is in the middle, about 680-699, you be charged 6.329% and pay about $1,863 a month.
If your score is low, between 620-639, you will be charged 7.518% and pay $2,101 a month---$316 more a month than a person with a high score.
Imagine paying over $300 a month MORE every month for thirty years!
Wow.
So...STEP 1 in preparing to buy a house is to get your credit score and go on a program to improve it. You can do this much more easily than you think: credit score formulas only look back about 2 years! Even with a bankruptcy, your credit formula will improve a great deal with just a short period of consistent, on-time payments. Credit reports also tend to contain mistakes, which you can find and contest online.
Even more significantly...your FICO is also sometimes used to decide what you will be charged for car insurance, whether you will be offered a job and whether or not a company or landlord will even rent you an apartment!
Insurance companies, employers and landlords often use FICO scores in an attempt to figure out whether or not you are dependable and trustworthy (for them, this means whether or not you are 1. generally careful and responsible and 2. capable of and willing to pay your financial obligations in full on time).
What your FICO DOES NOT MEAN: it does not tell anyone whether you are a good or bad person! It ONLY tells people whether you have figured out how to manage your financial life, and probably your day-to-day life, efficiently and responsibly.
The reasoning behind this general use of your FICO goes something like this:
* If you are good at meeting your financial obligations and paying your debts on time, you are probably also a more careful driver, a more conscientious employee and a dependable tenant who pays rent every month on time.
* If you are not so good at meeting your financial obligations (charging more than you can afford, paying bills/debts late or defaulting, and managing your financial life poorly) you are more likely to drive irresponsibly, work erraticly and pay your rent late or not at all.
The TAKE HOME MESSAGE for Pagans:
Our values often emphasize spiritual development, close relationships (fellowship) and interpersonal happiness. We can easily overlook the importance of getting a strong grip on our financial lives. This makes us vulnerable in a myriad of ways:
* We may be more likely to pay dearly for car and home loans.
* We may have a harder time getting high-paying jobs with health insurance.
* We may have a harder time renting apartments or qualifying for a mortgage.
* We may face higher levels of financial stress on a day-to-day basis.
* We may lack the knowledge to take easy steps to help ourselves financially.
* We may lack the skills to teach our children to thrive financially when they move out on their own, perpetuating an unnecessary cycle of poverty.
The GOOD NEWS:
Improving one’s FICO is not very difficult. It requires knowledge, planning, and the ability to create a financial support system. We can do those things well with a little help from our friends! We’ll tackle these issues one by one in later posts.
FICO stands for ‘Fair Isaac Corporation’. A FICO score is an attempt to take the human, subjective factor out of credit decisions. Instead of actually *looking* at your credit reports, companies today usually depend on the Fair Isaac Corporation mathematical formula---your FICO score---to estimate how risky it is to do business with you.
There are three different companies that compile your credit reports and create credit scores for you: Equifax, Experian and TransUnion. Each company uses a silightly different formula. Of the three, your Equifax report and score are probably the most widely used, because Equifax uses the famous FICO formula, while the others each have their own variations on it.
All the formulas rate your score on a scale that runs from 300-400 at the low end to 850-925 on the high end. Here, we’ll concentrate on the original FICO score, since that’s the score used most often. Your FICO can theoretically range from 300 to 850.
300 is a very low and very rare score. Declaring bankruptcy, for example, puts you at about the 400-450 range. 850 is the top of curve---no one gets a score of 850 except maybe Bill Gates. :) The higher your score, the better conditions you will be offered on the money that you borrow.
BUT....and this is important---your FICO can also affect how much you pay for insurance, whether or not you get a job, and whether you are allowed to rent an apartment. We’ll talk about this in a minute. Your FICO also makes a HUGE difference in how much you pay every month when you buy a house or a car.
If your score is at the top of the range, you will pay MUCH LESS. If it’s in the middle or at the bottom, you will pay MUCH MORE:
Here’s an example. You can see more examples (including car loan and 15-year home equity loan examples) on this page:
http://www.myfico.com
For a 30-year fixed mortgage...
If your score is great---760-850---you will be charged 5.931% interest on a $300,000 loan. You will pay about $1,785 a month.
If your score is in the middle, about 680-699, you be charged 6.329% and pay about $1,863 a month.
If your score is low, between 620-639, you will be charged 7.518% and pay $2,101 a month---$316 more a month than a person with a high score.
Imagine paying over $300 a month MORE every month for thirty years!
Wow.
So...STEP 1 in preparing to buy a house is to get your credit score and go on a program to improve it. You can do this much more easily than you think: credit score formulas only look back about 2 years! Even with a bankruptcy, your credit formula will improve a great deal with just a short period of consistent, on-time payments. Credit reports also tend to contain mistakes, which you can find and contest online.
Even more significantly...your FICO is also sometimes used to decide what you will be charged for car insurance, whether you will be offered a job and whether or not a company or landlord will even rent you an apartment!
Insurance companies, employers and landlords often use FICO scores in an attempt to figure out whether or not you are dependable and trustworthy (for them, this means whether or not you are 1. generally careful and responsible and 2. capable of and willing to pay your financial obligations in full on time).
What your FICO DOES NOT MEAN: it does not tell anyone whether you are a good or bad person! It ONLY tells people whether you have figured out how to manage your financial life, and probably your day-to-day life, efficiently and responsibly.
The reasoning behind this general use of your FICO goes something like this:
* If you are good at meeting your financial obligations and paying your debts on time, you are probably also a more careful driver, a more conscientious employee and a dependable tenant who pays rent every month on time.
* If you are not so good at meeting your financial obligations (charging more than you can afford, paying bills/debts late or defaulting, and managing your financial life poorly) you are more likely to drive irresponsibly, work erraticly and pay your rent late or not at all.
The TAKE HOME MESSAGE for Pagans:
Our values often emphasize spiritual development, close relationships (fellowship) and interpersonal happiness. We can easily overlook the importance of getting a strong grip on our financial lives. This makes us vulnerable in a myriad of ways:
* We may be more likely to pay dearly for car and home loans.
* We may have a harder time getting high-paying jobs with health insurance.
* We may have a harder time renting apartments or qualifying for a mortgage.
* We may face higher levels of financial stress on a day-to-day basis.
* We may lack the knowledge to take easy steps to help ourselves financially.
* We may lack the skills to teach our children to thrive financially when they move out on their own, perpetuating an unnecessary cycle of poverty.
The GOOD NEWS:
Improving one’s FICO is not very difficult. It requires knowledge, planning, and the ability to create a financial support system. We can do those things well with a little help from our friends! We’ll tackle these issues one by one in later posts.
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no subject
Date: 2008-03-15 04:04 pm (UTC)If you have a mortgage, a car loan, and maybe home line of credit don't pay them off quickly to reduce total debt. Just pay the minimum amount regularly (keeps the FICO score high) and invest in a good Index 500 mutual find. You will get an average rate of return on your investment that exceeds the interest rate on the debt. Of course, NEVER carry a credit-card balance; pay the cards off in full every month.
The scary part is taking-on the debt in the first place. Buying a house or a brand new car are significant purchases. But they do pay back well in the long run.
I've been doing this consistently since 1973. The cumulative result has been excellent.
no subject
Date: 2008-03-15 06:08 pm (UTC)no subject
Date: 2008-03-15 04:23 pm (UTC)no subject
Date: 2008-03-15 06:06 pm (UTC)no subject
Date: 2008-03-15 04:38 pm (UTC)no subject
Date: 2008-03-15 04:51 pm (UTC)When I heard this on "Creating Wealth on Your Current Income," I was surprised too!
no subject
Date: 2008-03-15 06:54 pm (UTC)no subject
Date: 2008-03-16 04:30 pm (UTC)no subject
Date: 2008-03-17 12:16 pm (UTC)I am impressed, dude.
Whoah.