What is FICO scoring and how does it affects debt ?

The acronym FICO is abbreviated to form the lettering for founder, the Fair Isaac Corporation. Specifically, it is a number between 300 and 850 that ranks credit worthiness. It is derived from a proprietary algorithm invented by said company. With a scale between 300 and 850, 300 is the worst score on the scale and 850 is the best.

The origins of the algorithm that produces the FICO score is a closely held trade secret, but over the many years that this formula has been used many have reverse engineered several of the important factors. For example, any late payments will lower your score and the more of them that occur and the later they are, the more heavily the score is affected. Another example is the total amount of debt carried per month. A less important factor is the number of credit cards and credit checks performed.

Individuals are rated according to a scale. Any score below about 620 is considered marginal and below 580 is decidedly poor. 720 and above is very good to excellent. A range between 620 and 720 represents a kind of gray area, where items other than your FICO will play a more significant role in loan decisions.

Banks, mortgage companies, credit card issuers and other lenders will use your FICO score as a very important criterion for deciding whether to make a loan, and at what interest rate. Other things being equal the higher your score the better interest rate you can obtain