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FICO® Scores are a mystery uncovered

First time home buyers in particular and everyone in general know the importance of their credit scores. Where do credit scores come from and what are they made up of? It all begins with something call “FICO”. What does "FICO" stand for? Let’s take a look and uncover the mystery behind your credit score.

Having a good FICO score is important when it comes to borrowing money, but as an acronym, the meaning behind "FICO" itself is not very clear. FICO simply stands for Fair Isaac & Company (NYSE: FICO), the company behind those ubiquitous credit scores. FICO scores are provided to about 90% of the top lenders for use in their decisions on whom to lend to, how much money to lend, and at what interest rate.

What does FICO stand for in your life?

If you've ever borrowed money or applied for credit, chances are that FICO played a big role in the process -- and what you paid (interest charged) for the privilege of borrowing money. Even if you didn't deal with FICO directly, your lender likely did. And based in part on the FICO score you had on the day you applied for your loan, that lender set the terms for your loan.

The higher your FICO score, the better the terms you get. For instance, the largest loan most people get is their mortgage. While most mortgage lenders may not publicly post the impact your FICO score has on their lending decisions, chances are really good that your score matters in how they treat you. Your credit card company might use your FICO score in deciding how to adjust your interest rate when it changes its terms, or in choosing whether to issue you a credit limit increase. Your auto lender might use it to figure out whether you qualify for its advertised ultra-low-interest rate financing.

In addition to the effects your FICO score can have on your ability to borrow money, it also can impact things like your car insurance rates. And while FICO scores themselves aren't generally used in employment decisions, the information in your credit report -- much the same information used to create that FICO score -- can be used to influence decisions on who gets certain jobs.

Can you improve your FICO score?

Given your FICO score's importance in things as varied as your employment, your insurance, and your ability to borrow money, you've got good reason to want to improve. Fortunately, it is possible to improve a bad FICO score over time. The keys to improving it are straightforward:

  • Pay your debts on time and as agreed.

  • Pay off the balance (but continue to use) on your credit cards, and don't charge your accounts to anywhere near their limits. Charge $300 and pay $300 within 30 days.

  • Only open new accounts if necessary, and keep your older credit card accounts open.

  • Check your credit report, and challenge any inaccurate information on it.

  • Give it time. Once resolved, accurate negative information will eventually age off your record.

Beware of credit repair scams that promise to get rid of legitimate bad information, often charging you hefty amounts for the service. Chances are that if you follow their "advice," you're setting yourself up to get your own identity stolen or wind up in jail for misrepresenting yourself on a loan request. You've probably seen ads from companies promising a "new credit identity" — that is, a fresh start for your credit history. It may seem like just the thing you need to get your credit back on track, but it's actually a scam. These companies often sell Social Security numbers illegally. If you use a number other than your own to apply for credit, not only won't you get credit, but you also could face fines or prison.

Anything a legal credit counseling service can do for you, you can do for yourself for free, and if someone is promising you something that sounds too good to be true, walk away. Chances are that any "help" they could offer you would either be very short-lived or cost you even more in the end.

Don't let your FICO score control your financial life

As important as your FICO score may seem, in the end, it simply measures how well you pay back money that you borrow. Having a decent handle on your borrowing is an important foundation, but it's not the be-all and end-all of your financial life.

Once you're in control of your debts and have started building your nest egg through saving and investing, you'll likely find that your FICO score will matter less to you. That even holds true if your score climbs to the levels where you could get the best terms on your loans. Indeed, if you treat being responsible with your debts as part of your overall financial plan rather than simply striving for the highest possible FICO score, you'll put yourself on a path to a better long-term financial future.

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