FICO Score - Free Credit Score
A FICO score is a credit score created by the Fair Isaac Corporation (FICO). Lenders of all types and lessors use FICO scores along with other relevant information to assess risk and make credit granting decisions. Following are some examples of how FICO score are utilized: (1) A mortgage lender must decide whether to make a loan and on what terms, (2) A lessor must decide whether to lease property to a tenant, and (3) The seller of a business needs to decide whether to offer financing for a portion of the purchase price to a buyer.
More than 95% of real estate lenders use the applicant’s FICO score to make a credit granting decision.
FICO evaluates data in the following areas to determine credit worthiness and a FICO score: (1) Payment history, (2) Amount of credit debt, (3) Types of debt increased, (4) Length of credit history, and (5) New credit accounts.
FICO scores range from 300 to 850 with a score of 670 or higher being considered good. FICO scores can be improved over time by understanding the following:
- Payment history counts for 35% of the FICO score and refers to whether a person pays their credit obligations on time. The longer a person pays on time, the higher the FICO score.
- Amount owed counts for 30% of the FICO score. It refers to the ratio of money owed to the amount of credit available. For example, an account that has $10,000 of available credit where $3,000 has been used is more valuable than an account that has $2,000 available where $1,000 has been used.
- Length of credit history counts for 15% of the FICO score. The longer a person has credit, the higher the FICO score. This means that old credit accounts should be paid down, but not off.
- Types of credit counts for 10% of the FICO score. People with a mix of accounts such as multiple credit cards, installment loans, and mortgages tend to have higher credit score than people with a narrow mix of credit.
- New credit counts for 10% of the FICO score. A person with newly opened accounts tends to a have lower FICO score than people with older accounts.
FICO scores are generally updated monthly, but monthly changes tend to be small absent something very significant such as a late payment or default.
While creditors may evaluate FICO scores differently, most use the following measurements:
Most conventional real estate lenders require a minimum FICO score of 620. FHA loans with a 3.5% down payment require a minimum score of 580. FHA requires a minimum score of 500 to 579 with 10% down, depending on other factors. Most VA lenders require a minimum score of 580 with no money down.
Following are ways to improve your FICO score:
- Pay your bills on time. Six months of on-time payments are required to see a significant difference in your score.
- Increase your credit line. If you have credit card accounts, call and inquire about a credit increase. If granted, it is important not to spend the increased amount so that you maintain a low credit utilization percentage.
- Do not close a credit card account. If you are not using a certain credit card, it is better to stop using it instead of closing the account. Depending on the age and credit limit of a card, it can hurt your credit score if you close the account.
Credit card holders should be aware that credit card issuers have the right to close inactive accounts or accounts that are not used regularly. If this happens, it can affect a debtor's overall utilization rate even if their overall use of credit does not charge. The fact that a debtor's utilization rate increases will by itself reduce his or her FICO Score. Consequently, it is important to use credit cards sufficiently, so they are not closed.
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