Do You Understand Your FICO Score?

When reviewing mortgage applications the information lenders look for first and count on the most heavily is the applicants FICO score. This score is what a loan officer uses in deciding how credit worthy an applicant is. It also has great influence over the terms offered with a loan. Lenders look for a high FICO score because they know that higher scores generally mean less risk for them. Low-risk applicants can count on better rates and loan terms.

The precise formulas and methods used to calculate a credit score are closely guarded proprietary secrets. Nevertheless, the FICO corporation, the leading developer of credit scoring processes, has made the general outlines of their process available to the public. Knowing this can help the consumer understand what factors are used to formulate their credit score and what items to correct or appeal to get a higher FICO score. The following list of factors provide a general outline of what the FICO looks at and what weight it assigns to these factors:

Payment Habits: Everyone knows it is important to make payments on time, and now you know why: this is 35% of your overall FICO score. Slow payments lower your score and conversely on-time payments raise the score.

Credit Used and Available Credit: This is an important ratio to a lender and it makes up 30% of your FICO score. Having plenty of available credit will raise your score. Also, paying down loans regularly but not closing them, and paying down your open revolving credit cards will increase the score. However, closing revolving credit accounts will lower the score.

Duration of Credit History: The FICO score is a tool to give creditors insight into how a person will behave if credit is extended. The longer the credit history the more information is available to indicate how a person will handle future loans. The longer your credit history the higher this part of your score will be. At 15%, it ranks third in weight for the scoring process.

Credit Diversity and Credit Inquiries: At 10% each these factors are still an important part of your score to understand. If a consumer has handled diverse kinds of credit appropriately it impacts the FICO score positively. However, if there are many inquiries into a persons credit the score will go down. The number of recent inquiries gives a lender a look at an applicants current financial picture, which is vital information when extending credit.

Knowing these factors and their relative weights can help the potential borrower modify their behavior in order to get a higher FICO score and hopefully more favorable terms for their loans.