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Low Interest Rates through High FICO Scores

By Ruth Racey
Published: Sunday, October 16th, 2011

FICO score is the numerical equivalence of the long years of accounted financial transactions and payment history found in credit reports. These two are the internationally accepted and used worthiness rating schemes which are ordered by lending agencies to assess whether the potential borrower is worthy enough to be entrusted with the company’s money and assets. The strong importance of these scores and reports to lending agencies was further ratified by its direct relationships to the definition of the interest rate to be charged to its owners.

Experts in this financial aspect can only speculate as much as they would want to because the specific calculations in the correlation of interest rates with scores and reports are classified corporate information. However, the years of experience that credit experts have spent studying this relationship resulted to precise approximations in the equivalent effects of reports and scores with interest rates.

FICO scores are rated from 300 to 800, the latter is considered to be the sainthood mark for this type of worthiness ranking system. Those who are trying to improve his or her FICO score would require undivided diligence in finding points of possible improvements in his or her report. An account holder’s report from any of the three major reporting companies would reflect the account holder’s use of his or her finance through five categories. Payment history accounts for 35%. Existing and unpaid debts are considered at 30%. The duration and timeframe of the existence of accounts is accountable for 15%. Categories of available debts and categories of debts used individually accounts for 10%.

The differences in the FICO score may seem too small for many account holders and consumers. But even the tiniest difference can make the best and cheapest lending deals unavailable to those who would want it. A shortage of 20 points between FICO score categories can increase the interest rates of its owner increase up to 1% which will translate to at least a few more hard earned dollars.

Those who suffer from this problem can opt to practice credit repair plans that would instantly increase his or her FICO score. The most common strategies in this area are the lessening of existing accounts and closing down debt related accounts. These steps prove to be effective FICO score boosts but their effects are deemed to take long term negative effects such as over utilization. Those who would want to lessen their interest rates by establishing good FICO scores must assess what they are giving up in the long run for a few scores up the worthiness scale.

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