The acronym, FICO, is named for the California-based Fair, Isaac and Co. It is a numerical score of credit-worthiness assigned to anyone who has applied for any kind of consumer credit. Everyone has a FICO score. If you're buying a home, this is especially important to know!
Until a few years ago, FICO scores had little to do with mortgage lending. Underwriters made decisions based on payment history and income-to-debt ratios. Then, they began to analyze the relationship between credit scores and mortgage delinquencies. People with low FICO scores defaulted on loans with far greater frequency than did their higher scoring peers.
In the past, mortgage underwriters made decisions based on payment history and income to debt ratios. Then, they began to look at the correlation between mortgage defaults and credit scores. It was found that people with lower FICO scores had more defaults than those with higher FICO scores.
FICO scores can be a bit different between the three national credit bureaus: Equifax, Experian, and Trans Union. Each agency uses the following issues to determine your score.
- Delinquencies. Do your best to avoid being late on any of your bills.
- Be careful not to open too many accounts in a short period of time. You run the risk of reducing your FICO score by opening several credit accounts in a short period of time. Creditors may conclude that you could be over-extended in the future and unable to pay your bills.
- Longer credit history is more impressive than a newly established one.
- Keep the balances on revolving accounts low. A consumer close to “maxing out” cards may have trouble making payments in the future.
- Be aware that public records such as: tax liens, judgments, and bankruptcies will jeopardize a healthy FICO score.
- Credit counseling services negatively affects FICO scores.
- Having a small balance without late payments can improve your FICO, showing that you manage credit responsibly.
- Too few revolving accounts. If you fail to use credit, there is no way to evaluate your ability to manage it.
- Too many revolving accounts. Multiple revolving accounts suggest a high risk of over-extension.
Interest Rates and Credit Score
Credit scores will probably affect your interest rate. Some lenders establish lower interest for high FICO scores and higher interest for low scores. Often, lenders will not loan to people with lower FICOs. The good news is that some lenders specialize in finding loans for customers with lower scores. It is advised that you keep looking for a lender who will work with you if you have a lower FICO