Is Your Fico Score Important?

Many people have heard of a FICO score. It’s the three-digit score assigned to you by the three big credit reporting agencies. It is designed to be a quick indication of your credit worthiness and is used as a benchmark for all manner of screening processes.
What is it?

Equifax, Transunion and Experian are credit reporting agencies that gather data about individuals to determine how trustworthy they are in the eyes of lenders. The term “FICO” comes from Fair Isaac Corporation who developed the score. Methodologies for calculating the score are different among the different credit reporting bureaus and the scores will vary.

What determines it?

These are the factors that reporting bureaus consider when calculating your FICO score:

• How much you owe compared to how much you originally borrowed
• Your payment history
• How long you’ve had credit
• What types of credit you have
• New credit applications

Different agencies have different data and will consider and weigh certain factors based on the others’ data. Because of this, you see variations in scores between agencies when pulling a comprehensive credit score report. Seldom are the scores the same between the different agencies.

Why is accuracy important?

Accuracy of the data that the agencies have is crucial. Inaccurate data is a major contributor to poor FICO scores. It is imperative that you know what your score is and what information they have in your file so that you can change or remove incorrect information in your account.

All three bureaus are required to send you one free report per year and you should take advantage of this if you haven’t already. Once you receive the reports, review them carefully. If you don’t understand items on your report, get an explanation. Go through the dispute process available through all of the agencies to clear any inaccurate information from your account. Your FICO score can improve considerably depending on how many inaccuracies you are able to clear up.

Is it important?

If you want to be considered for loans or credit, your FICO score has to meet the lending institutions’ standards or you likely won’t be approved. Whether you believe this is fair or not is irrelevant. Ninety percent of lenders use the FICO score as a major factor in approving lending or credit.

FICO scores are not used for employment applications. This is a very common concern. The truth is employers are allowed to pull employment credit reports, not FICO scores when evaluating potential employees. The employment credit report is an abbreviated report with certain sensitive information like date of birth removed from it. All three credit reporting agencies are on record saying that they don’t provide FICO scores to employers. The problem lies in the fact that people use “credit score” and “credit report” interchangeably.

(For more on how to understand and improve your credit score, check out Chapter 2 of my book “How do I improve my credit score?)

Employment aside, if you want to be able to secure loans or credit for whatever reason, you need to make sure your FICO score is the best it can be. Ensure the information in the credit agencies is accurate to maximize the chance of a good score.