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Credit Scoring with FICO
FICO
stands for Fair Isaac & Company, and credit scores are reported
by each of the three major credit bureaus: TRW (Experian), Equifax,
and Trans-Union. The score does not come up exactly the same on
each bureau because each bureau places a slightly different emphasis
on different items. Scores range from 365 to 840.
Some
of the things that affect your FICO scores:
Delinquencies
Too many accounts opened within the last twelve months
Short credit history
Balances on revolving credit are near the maximum limits
Public records, such as tax liens, judgments, or bankruptcies
No recent credit card balances
Too many recent credit inquiries
Too few revolving accounts
Too many revolving accounts
Sounds confusing, doesn't it?
The credit score is actually calculated using a "scorecard"
where you receive points for certain things. Creditors and lenders
who view your Credit
Report do not get to see the scorecard, so they do not know
exactly how your score was calculated. They just see the final scores.
Basic
guidelines on how to view the FICO scores vary a little from lender
to lender. Usually, a score above 680 will require a very basic
review of the entire loan package. Scores between 640 and 680 require
more thorough underwriting. Once a score gets below 640, an underwriter
will look at a loan application with a more cautious approach. Many
lenders will not even consider a loan with a FICO score below 600,
some as high as 620.
Credit
scores can affect more than whether your loan gets approved or not.
They can also affect how much you pay for your loan, too. Some lenders
establish a "base price" and will reduce the points on
a loan if the credit score is above a certain level. For example,
one major national lender reduces the cost of a loan by a quarter
point if the FICO score is greater than 725. If it is between 700
and 724, they will reduce the cost by one-eighth of a point. A point
is equal to one percent of the loan amount.
There
are other lenders who do it in reverse. They establish their base
price, but instead of reducing the cost for good FICO scores, they
"add on" costs for lower FICO scores. The results from
either method would work out to be approximately the same interest
rate. It is just that the second way "looks" better when
you are quoting interest rates on a rate sheet or in an advertisement.
FICO
scores are only "guidelines" and factors other than FICO
scores affect underwriting decisions. Some examples of compensating
factors that will make an underwriter more lenient toward lower
FICO scores can be a larger down payment, low debt-to-income ratios,
an excellent history of saving money, and others. There also may
be a reasonable explanation for items on the credit history which
negatively impact your credit score.
Even so, sometimes credit scores do not seem to make any sense
at all. One borrower with a completely flawless credit history had
a FICO score below 600. One borrower with a foreclosure on her Credit
Report had a FICO above 780.
Finally,
there are a few "portfolio" lenders who do not even look
at credit scoring, at least on their portfolio loans. A portfolio
lender is usually a savings & loan institution who originates
some adjustable rate mortgages that they intend to keep in their
own portfolio instead of selling them in the secondary mortgage
market. They may look at home loans differently. Some concentrate
on the value of the home. Some may concentrate more on the savings
history of the borrower. There are also "sub-prime" lenders,
or "B & C paper" lenders, who will provide a home
loan, but at a higher interest rate and cost.
One thing to remember when you are shopping for a loan is that
you should not let numerous lenders run Credit
Reports on you. Wait until you have a reasonable expectation
that they are the lender you are going to use to obtain your loan.
Not only will you have to explain any credit inquiries in the last
ninety days, but numerous inquiries will lower your FICO score by
a small amount. This may not matter if your FICO is 780, but it
would matter to you if it is 642.
In conclusion, a word of advice not directly related to FICO scores.
When people begin to think about the possibility of buying a home,
they often think about buying other big ticket items, such as cars.
Quite often when someone asks a lender to pre-qualify them for a
home loan there is a brand new car payment on the Credit
Report. Often, they would have qualified in their anticipated
price range except that the new car payment has raised their debt-to-income
ratio, lowering their maximum purchase price. Sometimes they have
bought the car so recently that the new loan doesn't even show up
on the credit report yet, but with six to eight credit inquiries
from car dealers and automobile finance companies it is kind of
obvious. Almost every time you sit down in a car dealership, it
generates two inquiries into your credit.
Nowadays,
credit scores are important if you want to get the best interest
rate available. Protect your FICO score. Do not open new revolving
accounts needlessly. Do not fill out credit applications needlessly.
Do not keep your credit cards nearly maxed out. Always make sure
every creditor has their payment in their office no later than 29
days past due. And never ever be more than thirty days late on your
mortgage.
Click here
for your free
credit report and find out today if
your personal credit report contains mistakes!
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