What’s this FICO Stuff?

A FICO score is a credit score developed by Fair, Isaac & Co. (also known as FICO) used by many lenders today to establish a borrower’s creditworthiness. A FICO score attempts to condense a borrower’s credit history into a single “objective” number. FICO’s scoring models are mathematical models that assign points to various aspects of a borrower’s profile and credit record. No one but FICO knows exactly how this top- secret credit scoring method works. Examples of items scored include current level of debt, late payments, length of credit history, types of credit, frequency of credit applications, number of credit inquiries, employment history, and negative credit information such as bankruptcies, collections, etc. The better the credit, the higher the FICO score.

Chances are in today’s mortgage market, FICO scores will be a huge factor in a lender’s decision to approve your mortgage. If you score high enough, your chances of getting the loan are extremely good. If you have a lower FICO score (below 620), you will have difficulty getting a loan. The following are the main FICO categories that lenders use:

  • 700+, you are the cream of the crop, eligible for the best rates.
  • 660-699, you are a good risk and will be eligible for good interest rates.
  • 620-650, you are in the “questionable” category. You will have to provide more documentation and work harder to get the loan, which will most likely not be at the best rates.
  • 620 and below, you are considered a high default risk, giving you the possibility of being declined.

There are really three FICO scores computed by data provided by each of the three credit reporting bureaus, Experian, Trans Union, and Equifax. Some lenders use only one of these scores, while other lenders use the middle score. FICO scores are only guidelines and other factors affect underwriting decisions. Some examples of compensating factors that will make an underwriter more lenient toward lower FICO scores can be factors such as a large down payment, cash reserves for at least 3 months, no derogatory credit history for at least the last 24 months, low debt-to-income ratios, etc.

No one outside of FICO knows exactly how FICO scores work, but the following are general guidelines on how to improve your FICO score. It’s good to have a few credit card accounts and a couple of department store charge cards (too little credit is not good). Loans with finance companies will probably not help your score. The ratio of available credit to your current credit balances is a major factor in determining your score (if you’ve charged your cards to their limits it will affect your score). Don’t make partial payments, pay as many of your monthly payments as possible in full. Lastly, avoid credit inquiries by limiting the number of credit applications you make.

Fair Isaac & CO. is headquartered in San Rafael, California, and can be accessed on the Internet at www.fairisaac.com.

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