When you begin talking credit to people the number one question that comes up has to do with FICO scores. The main question is what are they and how do they affect a person’s ability to get a loan?

Well the best thing that we can do is start from the beginning. Originally, credit scores did not affect a person’s ability to get a mortgage. It wasn’t until recently that some unsettling news came to light. There was a correlation between low credit scores and mortgage delinquencies. In fact studies proved that over 50% of borrowers with a score lower than 550 were over 90 days late at least once during their mortgage. The buyers that had scores over 800 did much better, in fact those buyers became delinquent much less, and one in 5,000 were late on their payments.

This is what caused lenders to pay more attention to the FICO scores. They have been studied by lenders so much they have realized the following:

• If your score is 595 there is a 2 to 1 chance of delinquency
• If your score is 600 there is a 4 to 1 chance of delinquency
• If your score is 615 there is a 9 to 1 chance of delinquency
• If your score is 630 there is a 18 to 1 chance of delinquency
• If your score is 645 there is a 36 to 1 chance of delinquency
• If your score is 680 there is a 144 to 1 chance of delinquency
• If your score is 700 there is a 288 to 1 chance of delinquency
• If your score is 780 there is a 576 to 1 chance of delinquency

So now that you know why FICO scores are used let’s look at what they are.

FICO stands for Fair Issac & Company. The credit scores lenders will be looking at are reported by each of the three major credit bureaus: Experian, Equifax, and Trans-Union. The score does not come up the same on each bureau because each bureau places a different emphasis on different items. Scores range from 365 to 840.

If you are worried about what affects your FICO scores or how high they need to be I will tell you this. When your lender is waiting for your credit report, your FICO score will be at the last page on the bottom. Anything below a 600 will result in worry and anything above 700 is considered a success.

There are many things that can affect your scores. Some of the most common things include:

• Too many accounts opened in one year
• Short term credit history
• Delinquencies
• Revolving credit accounts being near maximum balance limits
• Tax liens or bankruptcies
• No recent credit balances
• Too few or too many revolving credit accounts
• Too many credit inquiries

The credit score is added up by calculating certain points for certain things. A lender does not know exactly how your credit score is decided they only see the final outcome.

 

Scores and Interest Rates

FICO scores will not only affect your ability to get a loan but how much interest you pay for your loan too. Depending on your lender you will find that there is often a base price that you pay in interest. This base fee may go up if you have a lower FICO score or they may reward you by making the fee lower for those with a higher score. Some lenders will reduce a point in interest if your score is high enough.

The use of FICO scores in lending are mainly for guidelines. If you have a lower score it does not automatically rule you out for a loan. There are other factors that lenders will consider even if your scores are not as high as they should be. Some examples include:

• A higher down payment
• Low debt-to-income ratios
• A history of saving money

It is possible that you may have an excellent reason why there are negative scores on your record. If you can explain these, this will also help your chances at getting a reasonable loan.

Don’t take too much time worrying about your FICO score though. Sometimes a lender will find that your score will just make no sense. Occasionally a score will be entirely low for a person with perfect credit and a person that has tarnished credit will have a high score.

 

Things to avoid

Too many credit reports

When you begin looking for a home loan you should never let numerous lenders run a credit report on you. The reason is simple, the lender will be able to see the various credit inquiries for the last 90 days, but it may also lower your score. Your best bet is too have a good idea of the lender you want to use before you have them pull a report on you.

Refrain from big ticket items before a loan

When people start to look for a home one thing that they also consider is a new car to go with it. While the idea is nice it can mean that you won’t get your home loan. Generally what will happen is the purchase for the car will be noticed on the credit report and the balance will raise your debt ratio. Once this happens, many times it changes the price range that you would have been available to receive. It may even cause you to not be able to get the loan at all.

 

Conclusion

Your FICO score is important. It will see that you have the ability to pay lower interest rates. There are many things that you can and should do to make sure that your score stays as high as possible.

 

Do’s

• Use your credit on occasion
• Pay your creditors on time or no later than 29 days late

 

Don’ts

• Apply for needless credit
• Max out your credit cards
• Pay your mortgage more than 30 days late
• Open credit account when you don’t need them

 

As with all my articles, if you need help or assistance please let me know.