Credit Reports and FICO Scores
Good FICO Scores = Best Loan Rates
FICO scores (credit score) are what the vast majority of American mortgage lenders use to evaluate home loan applicants’ creditworthiness. The scores are based on a number of factors that analyze the electronic credit files maintained on virtually all adults in the U.S.
The scores range from the 300s to around 850, with higher scores indicating lower risk. Many lenders reserve their most favorable quotes of rates and fees for applicants in the upper FICO score ranges, 700 and above. Mortgage applicants in the low 600s and below get progressively higher rate quotes and are charged higher loan fees.
Your FICO score only looks at information in your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.
Your Score Takes into Account:
- Payment information on many types of accounts, including credit cards, retail accounts, car and mortgage loans.
- Public record and collection items such as bankruptcies, foreclosures, suits, wage attachments, liens and judgments.
- Details on late or missed payments (“delinquencies”) specifically, how late they were, how much was owed, how recently they occurred and how many there are.
- How many accounts show no late payments.
- Length of Credit History
How Scores are Established:
Approximately 15% of your score is based on your credit history. Generally a longer credit history will increase your score. The score considers both the age of your oldest account and an average age of all your accounts.
10% of your score is based on new credit or if you are taking on new debt. Opening a couple of new credit lines in a short period will hurt this score. If you are planning on buying real estate in the near future, put off buying a car until after it closes. A new car loan can have a big impact on what price of house you can qualify for.
10% of your score is based on types of credit in use. The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
30% of your score is based on amounts owned on all accounts.
Even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report. The score considers the amount you owe on specific types of accounts, such as credit cards and installment loans. Small balances without missing a payment shows that you have managed credit responsibly, and may be slightly better than no balance at all. Closing unused credit accounts that show zero balances and that are in good standing will not generally raise your score. A large number of accounts can indicate higher risk of over-extension.
35% is based on payment history. The first thing any lender would want to know is whether you have paid past credit accounts on time. This is also one of the most important factors though late payments are not an automatic “score-killer.” An overall good credit picture can outweigh one or two instances of, say, late credit card payments.