Most of us have heard about a credit score, but did you know that the actual name of your credit score is a FICO credit score? What exactly does this mean? For years the way that credit scores has seemed like an obscure game that big wigs play in a secret room without sharing with the public how it is calculated. The formula is complex and each credit bureau uses a different calculation model. This article has been designed to help you make sense of what a FICO score really is.

Perhaps you didn't know, there are three main large credit bureaus that calculate your credit score. The three bureaus are TransUnion, Equifax, and Experian. Each entity uses different computer software methods to calculate your score. These formulas have names like FairIsaac and the Beacon model just to name a few. What these formulas do is calculate your total risk. The software looks at your current debt amount, your payment amounts per month, and your history of paying them on time. Once the software has analyzed all the data, it averages out your credit score by comparing you to other people that also have about the same situation and measures the likelihood of how your group seems to do on average. After all these calculations are complete, POOF, you have a FICO credit score!

Many people don't pay enough attention to this score and really understand the importance of what it means. To put things in perspective, in order to buy a house you must have a 680 credit score. In order to buy a car you must also have a 650 credit score or above. In order to the prime, or the best, rates on a loan, you must have credit scores over 720. What this means is that if you have a 720 you could get a 5% interest rate on a mortgage as opposed to 6.75% if you had a 680. This rate difference may look small in this article, but if you had a 30 year mortgage, this difference is well over tens of thousands of dollars.

Your FICO credit score is essentially the largest key in having buying power. If your credit score is low, you can forget about being able to purchase the items you want. Make sure you are aware of what your credit score is and always make your payments on time to ensure that your score will be as high as possible.