Understanding FICO Scores
They are simply repository scores meaning they only consider the information contained in a person's credit file; they do not consider a persons income, savings or amount of a down payment for a mortgage.
Basically, the scores were designed to assess risk or a person’s likelihood to pay back a loan. The portion of the credit file considered and the weight (as provided by Fair Isaac) are as follows:
- Previous credit performance (35%) Trade line information specific to payment history
- Current level of indebtedness (30%) Current balance compared to the high credit
- Time credit has been in use (15%) Opening date
- Types of credit available (15%) Installment loans, revolving accounts, debit accounts
- Pursuit of new credit (less than 5%) Inquiries
In their booklet, "Understanding your FICO® score" (available for download in PDF format) Fair Isaac states, "A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time... Lenders use FICO® scores to help them make billions of credit decisions every year. Fair Isaac develops FICO® scores based solely on information in consumer credit reports maintained at the credit reporting agencies."
Scores range from 350 (high risk) to 950 (low risk). If your credit score is too low, you may be denied a loan or credit card. If it is low, but acceptable, you may be offered credit at a higher interest rate. In other words, high risk borrowers will be required to pay more than a person who has wisely used credit.
Here’s an example from the myFICO website for a $300,000 home loan (30 year fixed interest rate using sample September 19, 2008 data):
Keep in mind, this is a snapshot and is subject to change based on the time the loan is requested, the loan amount and the customer’s credit history. The lesson, however, is obvious. The better the credit score - the lower the payment.
To improve your credit score, here is what FICO® has to say: http://www.myfico.com/CreditEducation/ImproveYourScore.aspx
There are three major credit agencies that track and report your use credit:
Equifax - PO Box 105873 Atlanta, GA 30348 (800) 685-1111
National Consumer Assistance - CenterPO Box 2002Allen, TX 75013
Consumer Credit Questions: 888 EXPERIAN (888 397-3742)
Trans-Union - PO Box 390 Springfield, PA 19064 (800) 916-8800 (800) 851-2674
If you are ever denied credit you have the right to request a free copy of the report that was used to evaluate the decision. Contact the agencies or check the weblinks for more detailed information.
If you’d like to know more about purchasing a home in Southern Maine, please let me know. I’m a real estate agent based near Portland. In addition to helping you with finding a home, I can help you obtain your credit score and better understand how it will impact your ability to buy a home. I work with experienced lenders who can let you know how much money you’re able to borrow and how much your monthly payment is expected to be.
I hope this information has been helpful. Call me any time with questions - my advice is always free.
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