The most common credit score used by mortgage lenders in the United States is the FICO score. This score helps lenders determine a loan applicants creditworthiness and has a direct bearing on the terms that the lender is likely to offer any given individual. Generally speaking, the higher the FICO score, the lower the risk. This means that people with higher scores usually receive more favorable loan terms.
The industry secrets regarding how a FICO score is calculated is top secret. Fortunately, the company has allowed consumers a glimpse of the process by giving a list of what sorts of information they use and how they use it in analyzing and scoring a persons credit. This knowledge can help individuals clear up bad credit or appeal false information, and handle their available credit appropriately. Here is a list of the information the FICO Corporation uses and how it is weighted in their formula:
The most influential factor is ones payment history. This looks at the individuals history of making payments on credit accounts, and lowers the score for each late or missed payment. This factor is weighted at some 35% of ones FICO score.
Credit Used and Available Credit: This is an important ratio to a lender and it makes up 30% of your FICO score. Having plenty of available credit will raise your score. Also, paying down loans regularly but not closing them, and paying down your open revolving credit cards will increase the score. However, closing revolving credit accounts will lower the score.
Length of Credit History: This information counts as 15% of your FICO score. This factor is important because it can shows how a borrower has behaved in the past and is a pretty good indicator of how they will behave in the future. If you have a long credit history your score will be higher, while those just starting out will have a lower score in this area.
Two additional factors weigh in at about 10% a piece. These are the number of types of credit one has successfully managed and the number of recent credit inquiries. The FICO score generally considers the successful use of diverse types of credit as a positive factor. FICO also looks at the number of recent queries into a persons credit and considers this indicative of the persons current financial situation. The more queries made ” meaning the more credit the person has applied for recently ” the lower the score.
This outline should go a long way towards helping the consumer understand how their credit score, and specifically their FICO score, is calculated; it should empower consumers to act wisely, increase their FICO scores, and be rewarded with better terms for their loans.
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