Understanding FICO

By
Mortgage and Lending with Blue Water Home Loans NMLS# 166527

Understanding FICO
   Lending is FICO driven.  This is even more relevant in the risked based climate of our industry.  Therefore, the more you understand about FICO the better you will be suited to use credit and use it at a more favorable interest rate.  In this brief article I will be discussing FICO scoring.  We will try to understand the factors that lead the score on your credit report. 
 FICO stands for Fair Isaac Corporation of America.  FICO is a publicly-traded corporation (under the symbol "FIC") that created the best-known and most widely used credit score model in the United States. The FICO score is calculated statistically, with information from a consumer's credit files. The FICO score is primarily used in credit decisions made by banks and other providers of secured and unsecured credit. It provides a snapshot of risk that banks and other institutions use to help make lending decisions. Banks may deny credit, charge higher interest rates, demand more collateral, or require extensive income and asset verification if the applicant's FICO credit score is low. Applicants with higher FICO scores may be offered better interest rates on financial instruments such as mortgages or automobile loans. Lenders usually establish different credit score cut-offs to determine to whom they are willing to lend.

The following 5 key points will be considered:   1. What makes up the score?  2.  What actions will hurt the score?  3.  What does not affect the score?  4.  Approximate credit weight for each year.  5.  How to improve the score?
 
1.  What makes up the score?
 
*35%=based on payment history (i.e. on-time pays or delinquencies)
        -More weight on current pay history
 
*30%=capacity--ability to borrow
 
*15%=length of credit--how long you have had credit
 
*10%=accumulation of debt in the last 12-18 months
        -number of inquiries
        -opening dates
 
*10%=mix of credit
        -installment (raises score) vs. revolving (lowers score)
        -number of finance company loans, the more, the lower the score

 
 
2.  What actions will hurt the score?
  *Missing payments (regardless of dollar amounts...It will take 24 months to restore with one late pay)
  *Credit cards at capacity (i.e. maxing out credit cards)
  *Closing credit cards out (this lowers available capacity)
  *Shopping for credit excessively
  *Opening up numerous trade lines in a short time period
  *Having more revolving loans in relation to installment loans
  *Borrowing from finance companies
 

3. What does not affect the score?
  *Debt ratio (your total monthly credit obligations vs. your total monthly income)
  *Income
  *Length of residence
  *Length of employment

  4.  Approximate credit weight for each year
       *  40%=current to 12 months
       *  30%=13-24 months
       *  20%=25-36 months
       *  10%=37+ months
 

  5.  How to improve the score 
        *  Pay down on credit cards TO HALF MAX OR LOWER
       *  Do not close credit cards because capacity will decrease
       *  Continue to make payments on time (older late pays will become less significant with time)
       *  Slow down on opening new accounts
       *  Work to acquire a solid credit history with years of experience
       *  Move revolving debt to installment debt

www.fico.com
http://en.wikipedia.org/wiki/Fair_Isaac

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