One of the tools that lenders use to evaluate the borrower to repay a loan is what’s know as their FICO score. The FICO score was developed by the Fair Issac Corporation. Their scoring programs are often used to assist lenders in managing credit accounts, detecting credit fraud and automating lending decisions. The FICO score is a standardized approach that helps lenders deliver decisions on loans in an efficient manner.
FICO scores can range from 300 to 850. According to the FICO scoring system there are five factors that determine a borrowers score. Using these guidelines can help you improve a credit score:
35% — A borrowers payment history carries the most weight – Late payments on bills including a mortgage, credit card or automobile loan, can cause a consumer’s FICO score to go down.
30% — The borrowers credit utilization – The ratio of current outstanding debts such as credit card balances to the total available revolving credit (your credit limit). You can improve your FICO score by paying off debts and lowering your utilization ratio. Closing existing revolving accounts will typically adversely affect this ratio and could have a negative impact on your FICO score.
15% — The length of credit history – As your credit history gets longer, assuming you pay your bills on time, it can have a positive impact on your FICO score.
10% — The types of credit used (installment, revolving, or consumer finance) – There is some credit given to having a history of managing different types of credit.
10% —A recent search for credit or amount of credit obtained recently. If you have multiple credit inquiries as a consumer seeking to open new credit, such as credit cards, retail store accounts, or personal loans, it can hurt an your score. Applying for lots of new credit in a short period of time is also viewed as risky and can cause a drop in an individual’s score.
FICO scores do not take into account a borrowers salary, employment history, where they work, rental agreements, child support or other such obligations or interest rates on any current loans.
Generally speaking a credit score that is over 720 is often considered an excellent credit score. A score of 680 – 719 is considered good. A score that falls between the range of 620-679 will usually make the lender scrutinize the file further. Having a score that falls between 580-619 will typically disqualify you from getting the best rates (there are a few programs available on a limited basis for scores in this range). A score below 580 will almost always be too low to qualify for a loan.
There are three companies that report credit scores to lenders. They are Equifax, Experion and Transunion. The scoring of these agencies can often vary quite a bit. Each of the bureaus collects different information on the borrowers which can change the final score.
Here are some suggestions on how to improve your credit score:
- Pay all of your bills on time every month.
- Pay off some or all of your existing debt.
- Unused credit cards should not be closed. This can sometimes lower your credit score.
- Do not open a high number of new credit card accounts in a short period of time.
- Try not to have a balance of more than 50% of your credit limit on your revolving credit accounts (ie credit cards).
This is a lot of information and rules are constantly changing so if you are considering buying a home, it really is best to consult with a lender at the very beginning of the process to ensure your credit is where it needs to be. If it is not where it needs to be; it is best to find out early. If it is where it needs to be; great, and now you are prepared! If you need a recommendation for a great, reliable lender, let me know – I can provide a referral.
Some of the information for this post was obtained from massrealestatenews.com (http://www.slideshare.net/massrealty/massrealestatenewscom-fico-creditscoresandincreasingyourcreditworthiness1)