A FICO-score is a three digit number that determines the interest rate you will pay on your credit cards, car loan, and home mortgage, as well as whether you will be able to get a cell phone or have your application for a rental apartment accepted. Your FICO score can even affect your auto insurance premiums or your ability to get that job you applied for. FICO stands for Fair Isaac Corporation and is a tool the business world uses to size up how good you will be at handling a new loan or credit card, or whether you’re a solid citizen to rent an apartment to. A high FICO score will get you the best deals; a lower FICO score translates into paying higher interest rates on cards and loans.
The difference between the highest and lowest of acceptable FICO ranges (500-850) is about 3.5 points on a home loan, and more than 10 points on a four-year auto loan. That’s a big difference.
For example, on a four year, $20,000 auto loan, we’re talking about paying an extra $103 a month if your FICO score is in the 500-589 range rather than the top range of 720+. That’s $1,236 a year, which comes to $4,944 over the four years of the loan.
1) Get all three credit reports.
Since your FICO score is a calculations based on the history in your credit reports, your first job is to make sure everything is correct. The big three credit bureaus are Equifax, Experian, and Transunion. You can get the reports online, for free, once a year at www.annualcreditreport.com. Since creditors report to different bureaus, it is important to review all three reports.
Checking these reports is important because according to a recent survey by the U.S. Public Interest Group found that 79 percent of reports had some sort of mistake or error.
2) Fix the errors.
You can fix errors by filing a report online through each credit bureau. They in turn, will check the information with the creditor. Therefore, it is a good idea to contact the creditor as well to fix the error.
3) Get your FICO score.
After you’ve reviewed your credit reports and fixed any mistakes, you are now ready to get your FICO score. The charge for one FICO score is $14.95, so getting all three can get expensive. So which one should you get?
If you are planning to apply for a loan, typically a lender will check just one of your FICO scores. So you want to call them before you apply and find out which FICO score they will use. If they say Beacon score, that means it’s Equifax. If they say Empirica, it means they use TransUnion. The Experien name is self-evident – it’s Experian/Fair Isaac Risk Model.
The one exception is when you are buying a house. Because this is such a huge financial responsibility, mortgage lenders are going to check all three FICO scores. But spending $44.85 to make sure you’re in good shape for landing a six-figure mortgage isn’t asking much.
Taken from a summary of Suze Orman's The Money Book for Young, Fabulous and Broke.