Understanding FICO

Credit Score Overview

Generally speaking, your credit score is one of the main focal points when underwriting your mortgage application. Your credit score influences the credit that’s available to you and the terms available to you. It is a vital part of your credit profile that can affect interest rates and other terms of your loan, ultimately affecting your monthly payment.

When you apply for any kind of financing, lenders want to know exactly what risk they would be taking by loaning money. Lenders order credit reports on potential borrowers to help evaluate payment histories and future ability to repay the loan. The report is important because it gives a number that summarizes your credit risk, based on a snapshot of your situation at a particular point in time.

Credit scores are often called “FICO Scores” because most credit bureau scores used in the U.S. are produced from software developed by FICO (Fair Isaac and Company). But, it’s important to understand that not every credit score you can buy online is a true FICO Score.

About Credit Scores

The most widely used credit score is the FICO score, which was created by the Fair Isaac Corporation. Lenders use this score to help make billions of yearly credit decisions. Fair Isaac calculates FICO scores based solely on information in consumer credit reports maintained at the credit reporting agencies. FICO credit scores range from 300 to 850 and are calculated by a mathematical equation that evaluates many pieces of information from your credit report. By comparing this information to the patterns in hundreds of thousands of past credit reports, the score estimates your level of future credit risk.

Individual credit scores are calculated from a compilation of several different pieces of credit data in your personal profile. This data is grouped into five categories – payment history, amounts owed, length of credit history, new credit, and typed of credit used.

Your credit score considers both positive and negative information in your credit report. Late payments, collections, and bankruptcies will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.

Other Names for FICO Score

The FICO Score carries a different name at each of the credit reporting agencies. Even though created by different agencies, each score is developed using the same methods by Fair Isaac, and have been rigorously tested to ensure they provide the most accurate picture of credit risk possible. Three of the more popular credit reporting agencies utilized are Equifax, Experian, and TransUnion, and as previously stated they are all based upon the methods established by Fair Isaac.

Analyzing Your Credit Score

Credit scores theoretically have a range between 300 and 850.  However, in reality the vast majority of the public will fall within the 580-750 range. The higher your score, the lower the risk you are generally associated to be. But no score says whether a specific individual will be a “good” or “bad” customer.

While many lenders use credit scores to help make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given product. There is no single industry wide “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual interest rates.

It’s important to note that repairing bad credit isn’t an exact science and it takes time – there is not a quick way to fix a credit score. In fact, out of all of the ways to improve credit scores, quick fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast. The best advice for rebuilding credit is to manage it responsibly over time. If you haven’t done that, then you need to repair your credit history before you see credit score improvement.

Credit Reasoning

When a score is calculated from your credit report, the credit reporting agency will also provide up to five reasons for that particular score. It is important to realize that these reasons are usually negative, because it is giving the reasons why the credit score isn’t higher. For a very high score, it can include those positive reasons contributing to that score.

Minimum Calculation Requirements

In order for your score to be calculated, your credit report with the bureau from which you want your score must contain enough recent information on which to base your credit score. Generally, that means you must have at least one account that has been open for six months or longer, and at least one account that has been reported to the credit reporting agency within the last six months.

Three Credit Scores

You have three credit scores – one for each of the three credit bureaus: Equifax, TransUnion and Experian. The score from each credit reporting agency considers only the data in your credit report at that agency, and your scores may be different at each of the agencies. If your scores differ, it’s probably because each of your creditors do not report to each of the three agencies.