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Why Is A Good FICO Score Important?

September 19th, 2009

“A GOOD name is rather to be chosen than great riches, and loving favor rather than silver and gold.” Proverbs 22:1

In the financial world, your credit score is the same as your name. Having a “good name” can save you thousands of dollars in interest when you’re restructuring debt to reduce your payments and ultimately get out of debt. Just half a percentage point from 5% to 5.5% on a $100,000 30 year mortgage will cost you almost $11,148.26 in interest over the life of a loan. A full percentage point up would cost you $22,582.41 in extra interest payments.

FICO stands for Fair Isaac Corporation. FICO is a brand of credit score that is used synonymously with credit score much like Kleenex is used synonymously with facial tissue. The FICO score is calculated with information from your credit file. The data is grouped into five categories: payment history, amounts owed, length of credit history, new credit, and types of credit used.

This one little number determines your reputation with lenders. In the eyes of a banker, your FICO score reflects your character and consistency; and this is what it is created to do. The categories used to create the score, answers the questions: Did you pay your creditors as promised?; Did you pay on time?; Have you had credit for a significant period of time?; Did you use “good debt” versus “bad debt”?

Like it or not, this is the system we must operate in until we become debt free. Do you think your FICO score should be the primary determinate of your creditworthiness? What would be a better system?