Categories
Featured Articles
Next Steps
By Peter Robbins, Ph.D., Turning Point Mortgage
A FICO what?
Credit Score, Credit Rating, FICO Score, these are all terms used to describe basically the same thing: your money borrowing risk level. Lenders use this information to determine if they should lend you money...for your car...boat...extend a line of credit or provide you a home loan. Will you pay them back as promised? Most folks promise to do so, but how can a lender be sure? Enter…your credit score.
Your FICO score (Fair Isaac Corporation) provides lenders a very reliable estimate that you will and are able pay back what you borrowed. Your FICO score becomes a major player when applying for one of the biggest extension of credit...you home loan.
What does your FICO tell your lender about you?
Fair Isaac Corporation obtains information about most of your money transactions. From this information they'll compile information about:
• Your payment history (about 35% of your score)
• Account payment information
• Any adverse public records (bankruptcies, judgments, suits, etc.)
• Severity of delinquency (how long you've been past due on any and all accounts)
• Amount past due on delinquent accounts
• Time since past due items, delinquencies, bankruptcies, etc.
• Number of past due items on file
• Number of accounts paid as agreed.
• Amounts Owed (about 30% of your score)
• Amount owing on accounts
• Amount owing on specific types of accounts
• Lack of a specific type of balance, in some cases
• Number of accounts with balances
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
• Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
• Length of Credit History (about 15% of your score)
• Time since accounts opened
• Time since accounts opened, by specific type of account
• Time since account activity
• New Credit (about 10% of your score)
• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
• Number of recent credit inquiries
• Time since recent account opening(s), by type of account
• Time since credit inquiry(s)
• Re-establishment of positive credit history following past payment problems
• Types of Credit Used (about 10% of your score)
• Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
Whoa! That's a lot of info! It's important to note that your Score takes into consideration all these categories of information, not just one or two. The importance of any factor depends on the overall information in your credit report. In addition, your FICO score only looks at information in your credit report. And finally, your score considers both positive and negative information in your report.
Fair Isaac does a very good job of collecting, updating, and maintaining this information and the lenders take full advantage to minimize their risk...lending you money. Will you pay them back? The lenders don't just "Hope so." They use your FICO score to greatly hedge their bet.
What's a good score?
We all want the lowest rate possible when seeking a new loan. How can we get the best? A high FICO score along with a few other key indicators are your ticket. Looking at only FICO scores, any score of 720 and above will queue you up for the best rate available. You're Gold in the eyes of the lenders. Scores from 680-720 are very respectable and lenders will be more than willing to provide you a loan. Scores from 620-680 are folks who have some blemishes on their report. They can still obtain a loan but not at the best rate. Remember, the less risk the better rate you'll get and visa-a-versa. Any scores below 620 will have difficulty obtaining a loan unless other factors, such as high down payment, low debt to income ratio, net worth, etc. are in place. It costs nothing to call your mortgage broker to find out where you'll land with your score.
How do I find out my score?
Before you seek to obtain a new loan find out your credit score. How? You can do this for free at www.annualcreditreport.com. It's the only spam free official website. Be very careful, as there are many that are only spam sites to obtain your private information.
The Fair Credit Reporting Act requires each of the nationwide consumer reporting companies – Equifax, Experian, and TransUnion – to provide you with a free copy of your credit report, at your request, once every 12 months. The three companies have set up one central website, toll-free telephone number, and mailing address through which you can order your free credit report. The Federal Trade Commission (FTC), the nation’s consumer protection agency, wants you to know that, if you want to order your free annual credit report online, there is only one authorized website: www.annualcreditreport.com. An effective strategy is to does this every four month with one of the nationwide consumer reporting companies. That way you’ll be able to monitor your score during the year…all for free!
Another way to obtain your credit score quickly and easily is to call your local mortgage broker and let them know you're interested in obtaining a new loan and want to have a credit report run. It will cost you’re a little under $20 at most places.
Finally
It's been said that the best predictor of future behavior is past behavior. Knowing this, lenders use your FICO score (your past behavior) to predict your future likelihood of paying back what you owe when you said you would.
...I wonder if you can use a FICO score when a friend, family member, or anyone else wants to borrow money from you! I suppose you'd want to know if they'll pay you back.
Peter Robbins, Ph.D., is the founder and President of Turning Point Mortgage (a preferred partner of Fiztpatrick & Prince). For over 28 years, Turning Point has been providing excellent financial services to Southern California. To learn more, see our Partners page or visit Turning Point's website.