Saturday, September 19, 2015

Credit Scores

Fair, Isaac and Company (a.k.a. FICO) came into being in 1956 to help lenders determine the likelihood of consumers to repay loans. By issuing credit scores ranging from 350 to 900, FICO estimates that the higher the consumer's score, the more likely he is to pay back money borrowed timely and in full. 

Five factors comprise the credit score: payment history (35%); credit balances (30%); length of credit (15%); credit types (10%); and recency of inquiries (10%). 

If a borrower is required to pay a higher interest rate on money borrowed due to credit problems, his credit rating will improve once payments are made on time, creating opportunities to refinance to a lower interest rate.