What's Credit Got to do with It?

Credit scores, debt, credit, FICO scores, assets and liabilities--what does it all mean? Simple, if you don’t have a good deal of knowledge on these subjects, you will never be able to live a comfortable financial life style.

Understanding your credit and how to manage it are important elements of entrepreneurship and personal responsibility. The reality is that living exclusively on cash is no longer a viable option! This is a massive subject but I wanted to introduce it to the Music Talks community because it’s very relevant to entrepreneurship and personal development. This article will focus on FICO scores because they are at the core of your financial health!

FICO scores are everything. Nowadays, your credit scores and credit reports have little meaning. Up until fairly recently, if you wanted to purchase a car, new home or apply for a credit card, the potential lender would pull your credit report to see how you’ve been managing paying your bills. By looking at your credit report he or she was able to assess your credit worthiness. However, over the past several years that has changed. Currently, banks, mortgage companies, credit card companies (as well as other lending institutions) only pull your FICO scores.

So what is a FICO score? Furthermore, what does “FICO” mean? FICO stands for Fair Isaac Company. The Fair Isaac Company created a scoring system that most national lenders use when making a decision on whether or not to extend credit to you. Using data from your credit reports (gathered by the three credit agencies: Equifax, Experian and TransUnion) the Fair Isaac Company grades/scores you using a 3-digit number ranging from 300 to 850. These scores provide a kind of “snap shot” of your credit report from each agency. This allows potential lenders to look quickly at your credit worthiness without looking directly at your credit reports. It gives them a pretty good assessment of your credit reports’ condition. Thus, lenders determine if you can pay back the loan! With this scoring information lenders either approve or decline your application. If you’re approved, they have categories under which you fall. Your particular category is determined by how low or how high your FICO scores are. Moreover, the categories determine your APR%, monthly payments and the terms and conditions of the loan or home mortgage/equity loan for which you qualify--if any at all!

An example of this would be if you apply for a 30yr., fixed mortgage loan in the amount of $200,000 and your FICO score is 500-559, your APR% would be about 12.985%. The monthly payment would be $2,210.00. However, if your FICO score is 700-719, that same mortgage would be calculated at an APR% of approx 6.619% with a monthly payment of $1,280.00--a significant difference and savings!

One major point to keep in mind is that there is an important difference between your credit scores and your FICO scores. With the exception of Equifax, Experian, and TransUnion, credit agencies do not sell FICO scores to you. They sell their own version of your “credit scores”--a scam for them to make money! Thus, these are not the scores that lenders, banks, retailers, car dealerships, etc., pull to make their decisions. They pull your FICO scores! This is why financial literacy is so important!

The key to becoming more financially sound is to increase your FICO scores. The following list outlines some of the steps you can take to begin raising your FICO scores.

1. Know all three of your FICO scores.
2. Limit the number of credit checks and inquiries made to your credit reports.
3. Pay your bills early or on time.
4. Work at removing old and/or current negative items from your credit reports.

The magic number is 720. By having at least one or, better yet, two of your FICO scores close to, at or above 720, you are better grounded in the game! Taking action on the above items will increase your FICO scores. Doing so will provide you the credit and financial flexibility needed for your personal and professional growth!



September 15th, 2008

David



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