FICO Score Explained - Information and Advice

"Your FICO score affects your interest rate and borrowing power."

Your FICO Score, What Affects It and How Lenders Look At Them

Imagine a busy lending office and a loan officer has just ordered a credit report. He hears the whir of the laser printer and he knows the pages of the credit report are going to start spitting out in just a second. Your FICO score is about to be revealed.

There is a moment of tension in the air. He watches the pages stack up in the collection tray, but he waits to pick them up until all of the pages are finished printing.

He waits because the FICO score is located at the end of the report. Previously, he would have probably picked them up as they came off.

A FICO score above 700 will evoke a smile, then a grin, perhaps a shout and a "victory" style arm pump in the air. A score below 600 will definitely result in a frown, a furrowed brow, and concern.

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. Click here to see your FICO Score at the Fair Isaac website.


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.

FICO Scores and Interest Rates

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.

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copyright 1999 by Terry Light and RealEstate ABC

Related Pages

Credit History and Mortgage Approval - Your credit history affects your mortgage approval chances - Get a free credit report with credit score and qualify for a lower mortgage loan rate.

Credit Report Guide - Information and advice - Credit Report Guide - Resource links and tips about examining your credit report and FICO score for errors and omissions.

Credit Score Improvement - Credit scores myths and facts - How to improve your credit score - Get a free credit report with free credit score and improve your numbers.

FICO Scores Mortgage Information - How your FICO scores affect your loan rate - How to check your credit score yourself before applying for a mortgage.

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