What is a FICO® Score?

Credit Score

This is a guide for identifying what a FICO® score is and what it stands for. Fair Isaac & Company is the name for the most well known credit scoring system used by Experian, which is one of the credit bureaus used to calculate your credit score. Firstly, the credit bureau’s computer evaluates a complete credit profile and assigns a score, which is used to estimate credit worthiness. Furthermore, each of the three bureaus (Experian, Trans Union, Equifax) employs its own scoring system, so you will have 3 separate scores. As an example, someone with a higher score will be viewed as a better risk than someone with a lower score. Typically, scores will range from about 600 to 700 or above, although some cases will be outside this range.

What Kind of Score Do I Need for a Home Loan?

Most lenders will take the average of all 3 credit bureau scores to evaluate a credit application. Generally, you will have to have a minimum score of 620 for a lender to be able to get a loan.

How is My Score Determined?

To illustrate the FICO® model, see below for the 5 main elements considered to calculate your credit score.

  1. Your past payment history makes up 35% of your score. Therefore, the fewer the late payments the better. Recent late payments will have a much greater impact than a very old Bankruptcy with perfect credit since. There is Myth that paying off cards with recent late payments will fix your credit. Consequently, paying off you debt does not necessarily affect payment history.

  2. Your credit use makes up 30% of your score. Subsequently, Low balances across several cards is better than the same balance spread across just a few credit cards with balances at the maximum credit allowed on those cards. Further more, too many cards can bring down the score, but closing accounts can often do more harm than good when considering your entire profile. So, BE CAREFUL WHEN CLOSING ACCOUNTS!

  3. The length of your credit history makes up 15% of your score. For example, the longer accounts have been open the better for the score. On the contrary, opening new accounts and closing seasoned accounts can bring down a score a great deal.

  4. The types of credit used makes up 10% of your score. For example, finance company accounts score lower than bank or department store accounts.

  5. Inquiries take up the last 10% of your score. Multiple inquiries can be a risk if several cards are applied for or other accounts have high balances close to the maximum credit allowed on that card. Generally, multiple mortgage or car inquiries within a 14 day period are counted as one inquiry.

How Can I Raise My Score?

Follow these 9 Tips to improve your credit score:

1. Pay credit card balances strategically

2. Ask for higher credit limits

3. Become an authorized user

4. Pay bills on time

5. Dispute credit report errors

6. Deal with collections accounts

7. Use a secured credit card

8. Get credit for rent and utility payments

9. Add to your credit mix 

What Does This Mean to Me?

You should have your credit reviewed BEFORE you look for a home, and work with a PROFESSIONAL loan officer to make sure your loan is based on the most accurate information.

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