Part 1 of a Credit Score Series
FICO® Scores are calculated from different credit information sources in your credit report. There are five classes of categories (see below). The percentages in the categories below indicate the importance of each in your FICO Score calculation. FICO Scores factor in both positive and negative information from your credit report. Late payments, collections, inquiries and judgments can lower FICO Scores, but good credit can be re-established by making timely payments and cleaning up outstanding debts.
Your FICO credit score calculations are derived totally from the information reported in your credit report, but it is just one part of the equation in an underwriting decision (although one of the most important). When you apply for a mortgage, lenders also review income, liquid assets, career stability, equity position in the property, and for lower scores, positive compensating factors before making a loan decision.
Categories
Payment history (35%)
Logically, one of the most important factors in a FICO® Score. Lenders want to know if you pay on time.
Amounts owed (30%)
Credit accounts and open balances do not mean you are a high-risk borrower, but you want to keep below 50% of the maximum credit extended.
Length of credit history (15%)
Generally, longer credit histories may increase your FICO® Score, but even people who have short histories may have high FICO Scores, depending on their credit mix (be aware that many lenders require a recent two-year history of credit and a minimum of four trade lines, so start opening trade lines now if you have fewer than four).
Your FICO Scores will take into account the length of established credit accounts, the age of your oldest and newest account and the average age of all your accounts, as well as the timeframe between the opening and use of certain trade lines.
Credit mix in use (10%)
FICO Scores take into consideration your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
New credit (10%)
Research indicates a greater borrower risk when they open a number of credit accounts in a short time period especially if their credit history is minimal.
Generally, FICO® Scores range from 300 to 850. Industry-specific FICO® Scores have a slightly broader range, 250–900. Higher FICO® Scores demonstrate lower credit risk, and lower FICO® Scores demonstrate higher credit risk. A “good” FICO® Score varies by lender. One lender may offer its lowest interest rates to people with FICO® Scores above 730, while another lender only offers its lowest interest rates to people with FICO® Scores above 760. Scores run as follows: Poor > 580, Fair 580–669, Good 670–739, Very Good 740–799, Exceptional 800+.
Score: Facts & Fallacies
Scores determines whether or not I get credit. Lenders use a number of factors to make credit decisions. Lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.
Poor scores will always follow me. Scores change gradually as you change the way you handle credit. Taking the time to improve your scores will allow you to change your credit profile for the better and take advantage of more favorable interest rates.
My score will drop if I apply for new credit. Maybe, but if it does it won’t be by much. Applying for several credit cards in a short time period leads to multiple credit report pulls, and “inquiries” will appear on your report. Multiple pulls of credit requests trigger a red flag to review accounts for higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders if the credit is pulled within a short period of time.
By Carl Guzman
Carl Guzman, NMLS# 65291, CPA, is the founder and President of Greenback Capital Mortgage Corp. a Zillow 5 star lender http://www.zillow.com/profile/Greenback-Capital/Reviews/?my=y. He is a residential financing expert and a deal maker with over 26 years’ industry experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com, [email protected]
