What Is A FICO Score?
One of the first things a lender will check when you talk to them about a mortgage or any other type of loan is something called a FICO score. There are many scoring systems in use but the original credit scoring system was developed by Fair Isaac and Company, and is used to establish a borrower’s score as it relates to their likelihood of paying back on a mortgage or other loan.
A FICO score is the result of several mathematical formulas that take the borrower’s credit history and distill it down to a single number — the FICO score. Among the factors used to calculate the score are the borrower’s history of late payments on debts, the length of time the borrow has had credit, the amount of credit currently used as it compares to available credit, the amount of time the borrower has lived at the current address, employment history and any negative credit experiences such as bankruptcy and collection activities.
The exact formula used for calculating FICO scores has not been revealed by Fair Isaac and Company or the credit reporting agencies that utilize them. According to a Federal Trade Commission (FTC) ruling, this is acceptable.
FICO scores have significantly changed the process used to obtain a loan. In the "old days" each individual borrower was examined by the lender and decisions regarding approval were prone to bias and human error.
FICO scores generally run in the range from 300 to 850 or so. The higher the score, the better and less risky the borrower is deemed to be. Borrowers with low FICO scores that are still considered eligible for financing may have to apply in the sub-prime market where lending rates are higher.
Each of the three main credit reporting agencies, Equifax, Experian and Trans Union use variations of the FICO score to meet their specific requirements. Lenders will use the FICO score from all three credit reporting agencies and may use the middle score to base their decision upon.
If you have a FICO score that is lower than you would like, there are some things you can do to help raise it, but like most things in life, this takes time and is not something that happens overnight. Here are a few tips that may help you improve your FICO score:
- Pay your bills on time. Late payments can have a negative effect on your FICO score.
- Pay down delinquent balances first.
- Do not apply for credit frequently. Too many credit checks from frequent applications can damage your score.
- Seek new credit if your current credit is limited.
- Reduce your debt. Too much debt or credit cards that are at or near their spending limits can impact your score.
In general, people with the highest credit scores typically pay their bills on time, keep very little credit card debt outstanding and apply for new credit only when really needed.
There are factors that may make a lender more likely to overlook a somewhat low FICO score. These factors include a larger-than-usual down payment, low debt-to-income ratio and a history of spending and saving wisely.
Here are some interesting credit facts:
- There are over a thousand different credit reporting agencies in the United States.
- Two million credit reports are ordered each day.
- Two billion pieces of information are added to credit files every month.
- The average consumer’s credit report is updated five times per day.
It difficult to know how accurate it can actually be, but it might be interesting to try out the FICO score simulator that can be found at this site.