What is a FICO Score?
A FICO Score is a measure of borrower credit risk commonly used by mortgage underwriters when originating loans on owner-occupied homes. The score is based on your credit history and the frequency with which you use credit. Expressed as a number between 300 and 850, a high FICO score not only increases your chances of loan approval but also helps you secure more favorable loan terms.
Why is the FICO Score Important?
Lenders use the FICO score to assess:
- Whether the loan should be approved.
- What terms the lender will offer, including interest rates and down payments. A high FICO score indicates lower credit risk and typically results in better loan terms.
How is the FICO Score Calculated?
The FICO score is calculated using several factors:
- Payment History: Accounts for 35% of your score; consistency and timeliness of payments.
- Amounts Owed: Making up 30%; the amount of credit used versus the available credit.
- Length of Credit History: Constituting 15%; duration of owning and using credit accounts.
- Credit Mix: 10% of the score; variety of credit accounts such as credit cards, mortgage, and auto loans.
- New Credit: Accounts for 10%; new accounts and recent credit inquiries.
Improving Your FICO Score
Improvement of your FICO score is achievable through these strategies:
- Pay Bills on Time: Timeliness is critical for maintaining a good score.
- Reduce Debt: Lower your credit card balances and utilize less of your available credit.
- Avoid Opening New Credit Accounts Unnecessarily: This can lead to hard inquiries that temporarily reduce your score.
- Maintain Old Accounts: Length of credit history can positively impact your score.
- Monitor Your Credit Reports: Ensure accuracy by disputing any errors promptly.
Example Scenario
Consider Alice, who is shopping for a mortgage. When she applies for the loan, her FICO score is evaluated. Due to her high score of 780, the lender offers her a low-interest rate loan with minimal down payment requirements. If Alice had a lower score, say 620, she might be offered a subprime loan characterized by a higher interest rate and stricter payment terms.
Frequently Asked Questions
Q: What is the average FICO score? A: The average FICO score in the United States is around 710.
Q: Can checking my own FICO score lower it? A: No, checking your own score is a soft inquiry and doesn’t affect it.
Q: How often does my FICO score change? A: It can change as often as credit report information is updated, typically every month.
Q: What is the minimum FICO score required to get a mortgage? A: Most conventional loans require a minimum score of 620, but higher scores qualify for better terms.
Q: Can I raise my FICO score quickly? A: While there’s no overnight fix, paying off high-balance credit cards and correcting reporting errors can lead to relatively quick improvements.
Related Terms: Credit Score, Subprime Loan, Credit Report, Loan Terms, Mortgage Underwriting.
