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Understanding FICO/Credit Scores

A General Overview**

1.FICO scores, aka Credit scores, tell creditors how much of a risk you are, or how likely you are to repay the loan.

2.Lenders have found that borrowers with higher credit scores are less likely to default on a loan.

3.You have three (3) credit scores, not just one (1).  

4.There are three (3) major credit reporting agencies: Transunion, Equifax and Experian. 

5.Don’t be surprised if your three (3) credit scores are different; credit reporting agencies may use different computer scoring software.

6.The range is between 300-900 for certain credit reporting agencies, and 340-850 for others. 
7.The higher the score, the better, and the lower of a risk you appear to be to a lender.

8.The vast majority of folks fall in the 600s and 700s.

9.Credit scoring is based on Five (5) Factors:
  • 35%: Your Payment History (how well you pay your bills).  The below will negatively impact your credit score: 
    • missed payments and late payments. a 30-day late payment can reduce your score by as much as 45 points
    • bankruptcies (a bankruptcy may reduce your credit score by as much as 240 points).
    • foreclosures and short sales
    • charge-offs
    • repossessions 
    • loan defaults
    • debt settlements
  • 30%: Amounts You Owe (total amount of debt you owe.)
    • First, lenders look at your debt-to-income ratio which factors in how much you owe against how much income you make. The higher your income, the higher your limit for borrowing.
    • Next, lenders look at debt-to-credit ratio, meaning how much of your available credit you have used.  Lenders do not look favorably on those who have used 100% or maxed out their credit limits.
  • 15%: Age of Your Credit History and Number of Inquiries
    • A long history of good use of credit suggests to lenders that you are a good credit risk.
    • Inquiries are a related factor, which are also adversely affected by opening new lines of credit. Each time you apply for credit, the credit card company looks at your credit report. This is called an “inquiry” or a “pull” and it shows up on your credit report. Too many inquiries can lower your credit score because it may suggest to lenders that you are borrowing more than you can handle.
  • 10%: Variety of Types of Credit Used.  Ironically, more is better.  Lenders prefer a variety of debt in your credit history, both secured and unsecured.  Secured Debt is debt which has collateral, such as home loans and car loans, while unsecured debt is debt without collateral, such as credit card debt.  Lenders believe that someone who has timely paid off a variety of debt is a lower risk to them than someone who has never borrowed certain types of debt at all.   
  • 10%: Amount of New Credit For Which You Apply
10. Credit scoring software only considers items on your credit report.  Mortgage lenders typically look at other factors that aren’t included in the report, such as:
  • debt-to-income ratio: the ratio of housing expense to your income
  • ability to make a down payment
  • ability to document your income
  • employment history
  • type of credit you are seeking
11. Beware of “credit repair” organizations which promise to raise your credit score for a fee. This may be fraud, according to the Federal Trade Commission.
The only true credit score quick-fixes are:
  • pay down debt 
  • successfully dispute negative information on your credit report

* Disclaimer: This is intended to be a general guideline and is not a comprehensive explanation of credit scores.  Do not rely solely on this information. To obtain the most comprehensive, accurate information, seek counsel from a professional or expert in the area, a representative of the credit reporting agencies, and several licensed mortgage brokers or loan officers.
If you have questions about the application of the law in a particular case, consult your lawyer. The law is constantly changing. Information on this site or any site to which we link does not constitute legal advice.