When reviewing mortgage applications the information lenders look for first and count on the most heavily is the applicants FICO score. This score is what a loan officer uses in deciding how credit worthy an applicant is. It also has great influence over the terms offered with a loan. Lenders look for a high FICO score because they know that higher scores generally mean less risk for them. Low-risk applicants can count on better rates and loan terms.
How a FICO score is calculated is a proprietary industry secret held in the strictest confidence. However, the FICO corporation has made available a general outline of what information they use in the credit scoring process. Knowing what makes up a FICO score empowers consumers to raise their scores by handling credit appropriately. Here is a list of the factors used in calculating a FICO score, including how important each kind of information is to the formula:
Payment History: This data carries the most weight in the analysis. It makes up 35% of ones score. This is information about a persons payment history, whether it has been on time or not. Scores are lowered for slow payments.
Credit Used and Available Credit: This is an important ratio to a lender and it makes up 30% of your FICO score. Having plenty of available credit will raise your score. Also, paying down loans regularly but not closing them, and paying down your open revolving credit cards will increase the score. However, closing revolving credit accounts will lower the score.
The length of a persons credit history is the third most important factor, weighted at about 15% of ones FICO score. Since the FICO score is meant to help the lender predict how the consumer will behave with the loan, the more of a credit history the borrower has, the more likely it is that past behavior will be indicative of future behavior. Therefore, the longer ones credit history is, the higher the score will be.
Two additional factors weigh in at about 10% a piece. These are the number of types of credit one has successfully managed and the number of recent credit inquiries. The FICO score generally considers the successful use of diverse types of credit as a positive factor. FICO also looks at the number of recent queries into a persons credit and considers this indicative of the persons current financial situation. The more queries made ” meaning the more credit the person has applied for recently ” the lower the score.
This outline should go a long way towards helping the consumer understand how their credit score, and specifically their FICO score, is calculated; it should empower consumers to act wisely, increase their FICO scores, and be rewarded with better terms for their loans.
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