How Your FICO Score Impacts Your Credit

You've heard talk about credit reports and FICO scores and you may well have wondered just what the difference is between these things and why they even matter.

Your credit report is the detailed report that lenders look at before deciding whether you are a good candidate for a line of credit (credit card, loan, etc). Your FICO score is a part of that. Created by Fair Isaac & Co, your FICO score is a grading system that a creditor can quickly look at to see what kind of risk you will be to give a line of credit to.

Think of your credit report as the homework you do for a whole semester in school. At the end of the semester, all that work is looked over and a grade is given. The grade on your report card is like your FICO score. It's a quick number assessment that summarizes all the information in the rest of your credit report.

Many people wonder just how a FICO score is determined. That's a great question, but one you likely will not get the answer two. The credit agencies have not been willing to explain just how their number system works and regulators say they don't have to.

What you can know is that the lower your FICO number, the worse your credit is, and the less likely you are to be approved for lines of credit.

The credit reporting agencies have also said what kinds of things have an impact on your FICO score. Among the items that can see your score and credit rating go down are:

Late Payments

This applies to credit cards, loans and even monthly utility bills.

Too Much Debt

You should try to keep your credit card debt low and manageable. While you may have a number of cards that have low balances, all your outstanding debt is counted together in your credit report.

Too Many Inquiries

If you are applying for credit cards and loans regularly, each time one of those companies looks at your credit report, it will put a ding against you. Instead of applying for a lot of cards, shop around for the card you want and only apply for one that you have researched as being your best option.

Once you learn your FICO score, you can take steps to improve it by seeing where your weaknesses are and strengthening them. Just remember to be patient as it can take years to clear up bad credit and improve your FICO score.

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