Understanding FICO Scores
FICO scores (credit score) are what the vast majority
of American mortgage lenders use to evaluate home loan
applicants' creditworthiness. The scores are based on a
number of factors that analyze the electronic credit
files maintained on virtually all adults in the U.S. The
scores range from the 300s to around 850, with higher
scores indicating lower risk. Many lenders reserve their
most favorable quotes of rates and fees for applicants
in the upper FICO score ranges, 700 and above.
Mortgage applicants in the low 600s and below get
progressively higher rate quotes and are charged higher
Your FICO score only looks at information in your
credit report. However, lenders look at many things when
making a credit decision including your income, how long
you have worked at your present job and the kind of
credit you are requesting. Your score considers both
positive and negative information in your credit report.
Late payments will lower your score, but establishing or
re-establishing a good track record of making payments
on time will raise your score.
Your Score Takes into Account:
Payment information on many types of accounts,
including credit cards, retail accounts, car and
Public record and collection items such as
bankruptcies, foreclosures, suits, wage attachments,
liens and judgments.
Details on late or missed payments
("delinquencies") specifically, how late they
were, how much was owed, how recently they occurred and
how many there are.
How many accounts show no late payments.
Length of Credit History
How Scores are Established
Approximately 15% of your score is based on your
credit history. Generally a longer credit history will
increase your score. The score considers both the age of
your oldest account and an average age of all your
10% of your score is based on new credit or if you
are taking on new debt. Opening a couple of new credit
lines in a short period will hurt this score. If you are
planning on buying real estate in the near future, put
off buying a car until after it closes. A new car loan
can have a big impact on what price of house you can
10% of your score is based on types of credit in use.
The score will consider your mix of credit cards, retail
accounts, installment loans, finance company accounts
and mortgage loans.
30% of your score is based on amounts owned on all
Even if you pay off your credit cards in full every
month, your credit report may show a balance on those
cards. The total balance on your last statement is
generally the amount that will show in your credit
The score considers the amount you owe on specific
types of accounts, such as credit cards and installment
Small balances without missing a payment shows that you
have managed credit responsibly, and may be slightly
better than no balance at all. Closing unused credit
accounts that show zero balances and that are in good
standing will not generally raise your score. A large
number of accounts can indicate higher risk of
35% is based on payment history. The first thing any
lender would want to know is whether you have paid past
credit accounts on time. This is also one of the most
important factors though late payments are not an
automatic "score-killer." An overall good
credit picture can outweigh one or two instances of,
say, late credit card payments.
|Understanding the graph:
This chart demonstrates the delinquency rate (or
credit risk) associated with selected ranges of
the FICO score. In this illustration, the
delinquency rate is the percentage of borrowers
who reach 90 days past due or worse (such as
bankruptcy or account charge-off) on any credit
account over a two-year period. The graph
clearly illustrates the predictive power of the
FICO scores, which is why lenders rely on them
for credit decisions.