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What is a FICO score and how is it related to a credit report?

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You can think of it like this: the credit report is the raw data, and the FICO score is the quick-and-dirty number that sums up for creditors how risky you are. Your FICO score determines whether or not you're given a credit card or a loan, as well as what interest rate you'll pay, and can even influence a decision about whether someone will rent you an apartment or give you a cell phone.

A FICO score is calculated based on information from your credit report, specifically 1) your record of paying your bills on time, 2) the ratio of how much debt you have compared to the total of all your credit limits (i.e. how much of your credit you're currently using), 3) the length of your credit history, 4) how much you've been applying for new credit recently, and 5) your mix of credit cards and loans. (I used Suze Orman's The Money Book for the Young, Fabulous and Broke to refresh my memory on this list.)

A credit report lists every creditor you currently or recently have had a relationship with. (I think old creditors drop off 7 years after the account is closed.) For each credit card or loan, it lists the date you opened the account, your current balance, the starting balance or credit limit, and month-by-month whether your payment was on time, or late. There are three bureaus that collect this information, Equifax, Experian, and TransUnion.

You can obtain a free copy of each of your three credit reports once a year through annualcreditreport.com. Each of the bureaus will also offer to allow you to see your FICO score for an extra fee ($7.95 with my favorite, Equifax). I think it's well worth it to check it every 6 months or so.

One last note about FICO scores... the "FICO" part is important. The FICO score is the real one. I've seen lots of offers from credit cards, etc, offering a "free credit score." If they're not saying it's a FICO credit score, it's not, and it's pretty useless.

Lots of great information here: myfico.com. Enjoy!

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CBC News (in Canada) just posted an interesting article, and part of it addresses this question well:

Excerpt from Personal Finance: Your credit rating: How and why you should check it out:

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What's a credit score? And why is it so important? Basically, it's a mathematical formula that translates the data in a credit report into a three-digit number — between 300 and 900 — that lenders use to make credit decisions. It's a snapshot of your credit risk at a particular point in time. The higher your credit score the more likely you are to be approved for loans and receive favorable rates.

A credit score (also called a FICO score) is not part of a regular credit report. You'll have to pay to get that number.

The FICO scoring system was developed by Fair, Isaac and Company, Inc. — the pioneer in credit scoring.

Credit scores between 750 and 799 is shared by 27 per cent of the population. Statistics show that only two per cent of the borrowers in this category will default on a loan or go bankrupt in the next two years. So that means that anyone with this score is very likely to get the loan or mortgage they've applied for.
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(Refer to the article for more information. There are also some interesting user comments.)

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