What Is A FICO Score?
Hi and welcome to another Two Minute Tuesday Video. Today, I’m going to talk about your CREDIT SCORE also known as your FICO SCORE.
One important aspects of purchasing a home is getting a mortgage and getting a good, low rate is dictated by our ability to prove your credit worthiness. The term you are all familiar with is “FICO score” which is a rating system that lenders use to gage what kind of risk you are when applying for financing. There’s a saying in the business that “Past history is indicative of future performance.” So how you’ve managed your finances in the past will be pretty much how you’ll manage them when you get a new loan.
There is a lot of mis-conception about what your credit score is and how it is measured. First, there are 30 different credit scores on your record, so depending on what you are financing, a different model and score will be used. You can go to MyFICO.com and for $60 you will see all 30 scores plus all of your credit accounts.
If you go to CreditKarma.com or look on your bank statement, you’ll get what is called a “consumer information score” which is 20-40 points higher than your mortgage score. And If you’ve recently purchased a car, the auto loan score is also 20-40 points higher. Neither of these scores will be considered by a home loan lender.
So what items make up your mortgage FICO score?
Well 35% is how you pay your current mortgage and installment loans...such as auto loan, student loan etc . Are you always on time or have you had any late payments?
The next 30% is credit utilization; credit card or revolving accounts that may have a changing balance every month. These are your MasterCard, VISA, American Express, Nordstrom and retail store cards. Having a low balance on a high limit card is good credit utilization. So, a 1,000 balance on a $5,000 card is helpful while a $450 balance on a $500 limit is detrimental.
10% is the Length of time you’ve had an open credit card account. This is the reason you should never close a credit card account. Keep the account open and then occasionally charge something and pay it off over a month or two, making sure to pay it on time!
15% of the score is product mix - so they consider the variety of credit accounts you have open.
And the last 10% is new credit AND inquires.
There’s lots of misconception about inquiries being harmful. While all mortgage inquiries should count as 1 if drawn within 30-45 window, a mortgage underwriter may still look at the at how many you’ve had and draw their own conclusions. Let me just say, the fewer the better.
I’ll leave you with a few FICO tips:
One maxed out credit card can hurt you by 100 points. You might be able to remedy this by getting a credit limit increase or by paying down the amount owed.
Debt ratio has no effect on credit score. Assets and liabilities similarly have no effect.
Derogatory reports like a short sale or foreclosure stay for 10 years although they are only counted for 7 years. So underwriters will still see this record.
And lastly and Most importantly Your credit will get checked by the underwriter just before the loan is funded. So don’t go out and purchase new furniture, appliances, new car or even open a store credit card so you can get an extra 25% discount on today’s purchase. These will lower your final score and may disqualify you for the loan you are just days from signing!
I’d like to thank two associates for helping me with this information:
Randy Lynch from Golden Empire Mortgage - who will help you get a great loan and
Bob Topham from One Point The Difference - who will help you with credit repair issues.