Define FICO

FICO is a term that is used synonymously with credit score. FICO is simply an acronym for Fair Isaacs Corp. This is the company that came up with the formula to calculate a credit score. The formula is used by the three major credit bureaus -- Experian, TransUnion and Equifax.

Function

The purpose of the FICO score is to provide a numerical representation of a person's credit history. Nearly every financial move that a person makes is documented by the three major credit bureaus. These transactions and financial decisions are logged into the FICO software and it calculates a number for the credit bureaus. A higher FICO score means that you have a good credit history and are likely creditworthy. Scores range from 300 to 850.

Calculation

The formula that is used to calculate your FICO score is somewhat complicated and the specifics are not known to the general public. The biggest portion of your FICO score is based on your payment history. This part of the equation accounts for 35 percent of the number. This means that the frequency of your payments is critically important. Another 30 percent of your score is based on how much money you owe creditors. Other factors include the length of your credit history and how many different types of credit you have.

Lenders

Lenders use your FICO score regularly. When you apply for some type of credit, the lender will immediately pull up your FICO score. Lenders use this score as a quick way to look at your credit history and make a lending decision. Most lenders require a minimum credit score to issue a loan. The credit score will also impact how much the lender charges in interest. If your credit score is low, the interest rate charged might be higher than the interest charged someone with a better score.

Other Uses

Your credit score is used in a number of ways besides just in lending. For example, your credit score can impact how much you have to pay in a deposit. If you get a new cell phone or have utilities turned on, the company will look at your credit score. Even your insurance rates are affected by your FICO score. Your insurance premiums and deposits will be lower if you have a high credit score.

Improvement

Your credit score is not a permanent number. If you check your credit score and it is low, you can take the necessary steps to bring it back up again. By paying down the balances on your credit accounts and making your payments on time, you can significantly improve your score. It may take several months or years to bring it up to the level that you want, but it can be improved.