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FICO Score - a Brief
Explanation
When you apply for a mortgage loan,
you expect your lender to pull a credit report and look at whether you've
made your payments on time. What you may not expect is that they seem to be
more interested in your "FICO" score.
"What's a FICO score?" is a common reaction.
Each time your credit report is pulled, it is run through a computer program
with a built-in scorecard. Points are awarded or deducted based on certain
items such as how long you have had credit cards, whether you make your
payments on time, if your credit balances are near maximum, and assorted
other variables. When the credit report prints in your lender's office, the
total score is displayed. Your score can be anywhere between the high 300's
and the low 800's.
Lenders wanted to determine if there was any relationship between these
credit scores and whether borrowers made their payments on time, so they did
a study. The study showed that borrowers with scores above 680 almost always
made their payments on time. Borrowers with scores below 600 seemed fairly
certain to develop problems.
As a result, credit scoring became a more important factor in approving
mortgage loans. Credit scores also made it easier to develop artificial
intelligence computer programs that could make a "yes" decision for loans
that should obviously be approved. Nowadays, a computer and not a person may
have actually approved your mortgage.
In short, lower credit scores require a more thorough review than higher
scores. Often, mortgage lenders will not even consider a score below 600.
Some of the things that affect your FICO score are:
- Delinquencies
- Too many accounts opened within the last twelve months
- Short credit history
- Balances on revolving credit are near the maximum limits
- Public records, such as tax liens, judgments, or bankruptcies
- No recent credit card balances
- Too many recent credit inquiries
- Too few revolving accounts
- Too many revolving accounts
FICO actually stands for Fair Isaac and Company, which is the company
used by the Experian (formerly TRW) credit bureau to calculate credit
scores. Trans-Union and Equifax are two other credit bureaus who also
provide credit scores.
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