WHAT'S A FICO?
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FICO is a quirky little tool that lenders use to evaluate your creditworthiness. Your projected ability to pay is reduced to a single number. Your mortgage payments, car payments, and credit card bills over the years have been analyzed, sliced, diced, spindled and mutilated into your FICO score, a single indicator of whether you're likely to meet your future obligations.

  • Credit History:  How long have you had credit?
  • Payment History:  Do you pay your bills on time?
  • Car loans, Student Loans, Bank Loans:  Too many?  
  • Credit Card Balances:  How much of your available credit are you using?
  • Credit Inquiries:  How many times have you had your credit checked?
  • Law Suits and Judgements:  Are you in legal trouble?

Each of these and other points are assigned a value and a weight. The results are added up and distilled into a single blended number. FICO scores range from 500 to 800+, with higher being better. Typical home buyers find that their scores fall between 660 and 800. Higher FICO scores indicate that you are a better credit risk and may qualify for a better mortgage interest rate and/or a loan with a smaller down payment. 

What can you do about your FICO score? Since the score is based on your lifetime credit history, it is difficult to make a significant change in the number with quick fixes. Borrowing money for 12 months or more of steady payments helps if you are sure that lender will report your payments to a credit agency. For instance, I set up a loan for my daughter with a CD as collateral and an automatic withdrawal for her payments for a 12-month term to help build her credit file. Paying it off early wouldn't help as much as the steady payment record over time.

The way in which actuaries have developed FICO formulas offers some surprises. For instance, customers with no debt in the world often have lower scores than those with a good track record of making steady payments on current loans. Go figure.

When you apply for a mortgage loan, your lender will tell you your blended FICO score. Most lenders use credit scores from each of three national credit agencies. If you don't like surprises, you can get your scores in advance from various websites, but your lender's version is likely to be more comprehensive than those you obtain online. Conveniently, at annualcreditreport.com, you may review your credit history once a year for free. The three national credit agencies that track your credit history and create your FICO scores offer their own websites: www.equifax.com, www.experian.com, and www.transunion.com.

Armed with this information, you will be a more informed consumer and be better positioned to obtain the most favorable mortgage possible. AND, you can be sure there are no mistakes feeding into the database that will drive your score lower than the one you deserve.

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