When reviewing mortgage applications the information lenders look for first and count on the most heavily is the applicants FICO score. This score is what a loan officer uses in deciding how credit worthy an applicant is. It also has great influence over the terms offered with a loan. Lenders look for a high FICO score because they know that higher scores generally mean less risk for them. Low-risk applicants can count on better rates and 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.
Available Credit Ratio: This is the second highest-weighted factor, making up 30% of the score. The scoring process looks at how much credit has been extended to a person and compares it to how much credit is outstanding at any given moment. Available revolving credit will increase a persons score; closing revolving accounts will lower the score. Paying down outstanding loans regularly without closing them also has a positive affect on your FICO score.
The length of a persons credit history is the third most important factor, weighted at about 15% of ones FICO score. Since the FICO score is meant to help the lender predict how the consumer will behave with the loan, the more of a credit history the borrower has, the more likely it is that past behavior will be indicative of future behavior. Therefore, the longer ones credit history is, the higher the score will be.
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.
Related posts:
You must log in to post a comment.