FICO Scores 101

If you don’t think that your FICO® scores are important, think again. The interest rate you can expect to pay for a loan is dependent on these scores. The difference between a FICO® score of 620 and 760 can often be tens of thousands of dollars over the life of your loan. A low score can cost you money each month or even cause the home you want to be unaffordable.
Basically, the higher your FICO® scores the less you can expect to pay for your mortgage loan.  Learn to take control of your FICO® score and save money on your mortgage payments.

FICO scores range from 300 to 850. If all three FICO scores are viewed on the same day they will typically vary between zero and fifty points. The purpose of the score is to predict the likelihood of 90+ day delinquency over the next 24 months. As of (April 2017) data, the national distribution of FICO credit scores is as follows:

The General Formula for FICO Scores

FICO Credit Score Tidbits

• Six payments are required on an active loan to generate a FICO score for the first time,
  
• A denied loan request has no impact on a FICO credit score.
• Debit card payment history is not part of a credit score.
• Credit counseling is treated as a neutral factor, neither helping nor harming the FICO score,
• The model is not offended by a large number of credit card accounts.
• A bankruptcy filing is the single worse thing you can do to a FICO credit score,
• Chapters 7, 11 & 12 Bankruptcies will remain on a credit report for ten years, A Chapter 13 Bankruptcy will remain on a credit report for seven years.
• All other negative information on a credit report will remain on the credit bureau for seven years.
  
• In current versions of the FICO score, all authorized user accounts on a credit report are included in the score.
• If you have co-signed for a loan and the account is on your credit report, then it is in your credit score.
• When payments are due on student loans they are part of the credit score calculation. When payments are not due, they are not included in the score.

Payment History
When assigning points gained or lost for payment history information, the FICO score looks at four separate components:

• Frequency
• Severity
• Amount Owed
• How Recent is the Event

Here is how Fair Isaac assigns the severity of a credit problem according to the time it has been on a credit bureau:
Percent Negative Impact
Most recent 12 months                                 93%
Prior 12 to 24 months                                   60%
Prior 24 to 36 months                                   44%
Prior 36 to 48 months                                   33%
Older than 4 years                                        22%
Source: Credit Scores & Credit Reports, Evan Hendricks, Privacy Times, Inc

Capacity is King
Almost as important as how you pay your bills is the amount owed on your various accounts (i.e. capacity), The FICO model considers three separate components of your credit when assigning capacity points=
1. Your installment balances compared to the original loan amounts.
2. Your revolving account balance compared to your revolving credit limit on an account-by-account basis; and
3. Your total revolving account balances compared to your total revolving limits.
By far, the total revolving limits available (#3 above) carries the most potential points and the potential loss of points.
Why does capacity carry so much weight in tie FICO scoring model? Because the FICO model knows that the majority of Americans who go bankrupt charge up their cards to the limits before they file.
In order to understand capacity, you must understand the math problem that determines how this large number of points is gained or lost.
% Revolving          Dollars Available on Total Revolving Accts.
Available               Total Reported Limits on Revolving Accts.

Keys to Capacity Success

• You want your "% of Revolving Available" number to be as high as possible.
• You accomplish this by keeping your revolving balances as low GS possible and your limits as high as possible.
• It is very easy to get all of your capacity points (but it rarely happens).
• Don't close revolving accounts.
• Some HELOC (A Home Equity Line Of Credit ) loans are in the capacity calculation, but some are not.
  
• For scoring purposes, it is better to have small balances on a number of cards than to have a large balance on a single card.
  
• Please note that paying off your balances in full each month does not guarantee a great capacity calculation.
  

Items that Hurt a FICO Score

• Late payments and derogatory public records.
• A low level of "percent available" on individual revolving accounts and total revolving accounts (Le capacity).
• Closing revolving accounts,
• Having a lender lower the limit on a revolving account or not reporting the limit on a revolving account,
• Multiple new revolving accounts in a short period of time.
• Settling a debt for less than the full balance (because the settled date is more recent than the original date).
• Having loans at "second tier" finance companies.

Strategies that Will Improve a FICO Score

• Ensure credit bureau data is accurate & dispute legitimate errors.
• Focus on bringing currently delinquent loan accounts current, Don't allow current loans to go delinquent or to go further delinquent while using cash flow to pay on old collection accounts,
• Comparison shop for mortgage and auto loans within a 14-day period of time to minimize the impact of hard inquiries.
• Pay off and close "second tier" finance company trade lines,
• Pay down the credit cards first that are near their limits (assuming interest rates are close to the same).
• Pay down total revolving balances, but do not close these accounts,
• Move revolving balances to installment debt; but again, do not close the revolving accounts,
• Minimize new accounts.

Checking your credit rating before you talk to a lender when purchasing your home will give you time to correct reporting errors and to prepare your score.
I help clients to make informed decisions when pursuing the dream to buy a home. Contact me and we'll get you started!

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Iveth Caruso
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Disclaimer:  All information provided is deemed reliable, but is not guaranteed and should be independently verified.