Your FICO Score...What it is and how it is calculated
Prepared by Maureen Broderick, Sr. Mortgage Loan Officer, NMLS #698316, Fifth Third Bank
Whether we are buying a home, a car, looking to open a charge card or to obtain car insurance or homeowner’s insurance, our credit is now the key factor. In 1989 the FICO score was introduced by Fair Isaac & Co and became the FICO model for banks and credit grantors and is based on consumer credit files for the three credit bureaus.
The FICO credit scores range from 300-850. We as lenders/realtors are always conscientious about what our potential buyer’s/borrower’s FICO scores are in order for them to buy a home. Do we ever worry about our own FICO scores? Are we all aware of the 10 things about our credit scores and how they are calculated or do we just hope and pray that they are high? Do we worry more about our client and forget about ourselves? Habit shows that we don’t really know how our own FICO scores are calculated.
The following are the 10 things that we should know about our credit score and know how they are calculated:
1. Get a copy of your credit report.
2. Review it for any mistakes or misinformation.
3. Dispute any wrong information & attempt to have it removed. In a dispute you will need to show supportive documentation to prove it along with a dispute letter. The bureaus then go back to your lender to verify. This process must be done to all of the bureaus too.
4. Know the factors that affect your FICO scores
a) Payment history = 35%
b) Amount owed on credit lines = 30%
c) Length of credit history = 15% ( They’re looking for credit experience in this area)
d) Have a good credit mix = 10% (If you only have a car loan go open a charge card…in
order develop a FICO score –3 lines of credit are needed.
e) New credit = 10% ( Too many new accounts raise red flags…. How many times do we
get cornered to open a store credit card for a discount? Truly think about the effect of
it on your credit score.
5. Develop a strategy to rebuild or build your FICO scores.
6. Pay bills on time as late payments affect FICO = 35%
7. Keep credit card balances below the minimum – Golden rule is 40% below the credit limit.
8. Payoff negative credit/collections
9. Keep inquiries to a minimum – opening and closing credit cards will have a direct impact on your FICO score. Hard pulls on your credit for a mortgage, car or credit cards will take a few points away from your FICO score.
10. Don’t close paid off credit cards. The reason is credit scoring compares total credit debt to credit utilization. If you close those lines of paid off credit and have other debt, it will have a negative effect on your FICO score.
In knowing how your own FICO scores are calculated on what has a positive impact and what causes them to be lowered, will aide us in working with future borrower’s/homebuyer’s in today’s fast paced real estate market. Credit dictates a person’s ability to buy and we have the capabilities of helping them if they need direction to become first time buyers or repeat buyers. Credit education will help us all personally and in our work profession. It’s valuable information and can be readily shared to all and something we don’t really think about for ourselves until our credit is pulled.