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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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