Scoring your Credit - How's your FICO?

In today's increasingly automated society, it should come as no surprise that when you apply for a mortgage, your ability to pay can be reduced to a single number.  All the years you've been paying your mortgage, car payments, and credit card bills can be analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The best known is called the FICO score, based on a model developed by Fair Isaac and Company (hence the name) and used by Experian.  Equifax's model is called BEACON, while TransUnion uses EMPIRICA.  While each of the models considers a range of data available in your credit report, the primary factors are:

Each of these, and other items, are assigned a value and a weight. The results are added up and distilled into a single number. FICO scores range from 300 to 850, with higher being better. Typical home buyers likely find their scores falling between 600 and 800.

FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.

What can you do about your FICO score?  Unfortunately, not much. Since the score is based on a lifetime of credit history, it is difficult to make a significant change in the number with quick fixes. The most important thing is to know your FICO score and to ensure that your credit history is correct. Conveniently, Fair Isaac has created a web site (www.myFICO.com) that let's you do just that.  For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. Also available is some helpful information and tools that help you analyze what actions might have the greatest impact on your FICO score. Each of the credit services offers similar services on their web sites: www.equifax.com, www.experian.com, and www.transunion.com.

Caution: Although the above links to the credit bureaus offer very useful information, ordering multiple credit reports within a certain period of time, could actually lower your FICO score!  However, ordering a copy of your credit report once a year from one of the agencies is a good practice, so that you may monitor your credit and make sure there is not fraudulent activity on your credit report.

At the time you start thinking on purchasing your home, you must consider and do the following:

1) Do not make any major item purchases using your credit cards.

2) Do not apply for any new credit.  This includes a) New credit cards, b) credit card balance transfers, c) new automobile loan or any other installment loan.  These situation can greatly impact your FICO scores.

3) Keep your credit card balance between 30-40% of your credit limit.  If your credit card balance is above this limit, your FICO score could be affected and you should pay down your credit card balance.  Also be careful when being offered department store credit cards with "Zero-interest for one year" or something similar.  The reason is that although you may be saving on interest, this is still a new credit card account and an inquiry on your credit report and this will also affect your FICO score.  So in the long run, the interest that you think you're saving on your new credit card will be offset by the higher interest rate on your mortgage loan, due to your lower FICO score.

TIP: Any time you fill out a credit application for anything, the company you're applying with will run your credit, therefore placing an inquiry on your credit report.  Many inquiries on your credit report will reduce your FICO score.  (Even when you fill out an application at a department store that offers you a free umbrella, just for filling out an application).  Now that free umbrella is not so free anymore.  However, when you are shopping for a home loan and different lenders pull your credit report within 30 days of each other, it will only count as one inquiry, so it will not affect your FICO score as much.

Aiello & Associates is approved with ACRANET/LendServ Credit Reporting Agency and your credit report can be obtained for a fee of $15.00, which will include all three FICO scores from the above credit reporting agencies (also called a "Tri-merge Report"). This is the report mostly used in the mortgage industry and which is submitted to the lender for loan approval.  The middle FICO score is the score that most lenders use in determining your interest rate and/or loan program.

Note: By pulling your credit report a few times within a short period of time may reduce your overall FICO score.

Armed with this information, you will be a more informed consumer and better positioned to obtain the most favorable mortgage available to you.