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FICO Score - a Brief Explanation
When you
apply for a mortgage loan, you expect your lender to pull a credit report
and look at whether you've made your payments on time. What you may not
expect is that they seem to be more interested in your "FICO" score.
"What's a FICO score?" is a common reaction.
Each time your credit report is pulled, it is run through a computer
program with a built-in scorecard. Points are awarded or deducted based on
certain items such as how long you have had credit cards, whether you make
your payments on time, if your credit balances are near maximum, and
assorted other variables. When the credit report prints in your lender's
office, the total score is displayed. Your score can be anywhere between
the high 300's and the low 800's.
Lenders wanted to determine if there was any relationship between these
credit scores and whether borrowers made their payments on time, so they
did a study. The study showed that borrowers with scores above 680 almost
always made their payments on time. Borrowers with scores below 600 seemed
fairly certain to develop problems.
As a result, credit scoring became a more important factor in approving
mortgage loans. Credit scores also made it easier to develop artificial
intelligence computer programs that could make a "yes" decision for loans
that should obviously be approved. Nowadays, a computer and not a person
may have actually approved your mortgage.
In short, lower credit scores require a more thorough review than higher
scores. Often, mortgage lenders will not even consider a score below 600.
Some of the things that affect your FICO score are:
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Delinquencies
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Too many accounts opened within the last twelve
months
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Short credit history
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Balances on revolving credit are near the maximum
limits
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Public records, such as tax liens, judgments, or
bankruptcies
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No recent credit card balances
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Too many recent credit inquiries
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Too few revolving accounts
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Too many revolving accounts
FICO actually stands for Fair Isaac and Company, which is the company used
by the Experian (formerly TRW) credit bureau to calculate credit scores.
Trans-Union and Equifax are two other credit bureaus who also provide
credit scores.
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