The Buyer's Journey: FICO® Score

Understanding your FICO® Score is critical in the Buyer's Journey. In a previous article, I discussed the importance of a mortgage pre-approval and touched briefly on credit scores. When you apply for credit, such as a mortgage, your lender will check your credit report and your credit score, more specifically your FICO® Score, to evaluate your risk. 

FICO or Fair Isaac Company is a data analytics company that founded the FICO® Score. It is not the only company that provides credit scoring services, but it’s by far the most well-known because FICO® Scores are used in over 90% of lending decisions. Any mortgage that is sold to Fannie Mae or Freddie Mac will certainly use the FICO® Score as opposed to the VantageScore produced by VantageScore Solutions (and used by Credit Karma). The national average FICO® Score is 695, which is considered "good" credit. Below is a break down of the ranges of FICO® Scores.

The FICO® Score model has 5 different predictive categories, with varied levels of impact, that are used to evaluate the credit risk of individuals.

1. “Payment History” is the biggest piece of the pie, making up 35% of the predictive information and looks at how recent, how severe and how many delinquencies are on your record. It’s very important not to miss payments before obtaining a mortgage, and definitely avoid public record and collection items. 
2. “Outstanding Debt” is the second significant influencer of the credit score at 30%. This variable evaluates how much you owe creditors and more importantly, the percentage of available credit are you using. Having a low level of utilization implies that you can manage your money well.
3. “Credit History Length” represents 15% of the credit score. How long have you had credit experience? The longer the better so opening a credit card at an early age is a good idea (as long as you can pay the balance in full each month and keep that line of credit active).
4. “Pursuit of New Credit” accounts for 10% of the information going into the credit score. The only type of credit inquiry that will impact your score are those initiated by the consumer to seek credit within the last 12-months. If an inquiry is done more than 12-months ago or without the intent to receive credit, there will be no impact.
5. “Credit Mix” is the remaining 10% of the credit score evaluation. Having a well-rounded experience with various credit products (revolving credit, installment credit) is preferred and shows you can manage different types of debt. But that doesn’t mean you should open up a new product type to boost your score.

We live in a world of identity theft and while luckily I have not been a victim, I personally know many others who have been less fortunate. There are ways to defend your personal information and be vigilant of your credit status.

1. Pay bills online instead of regular mail. If you have to use regular mail, access a locked mailbox for both incoming and outgoing mail.
2. Send Personal Identifying Information through secured, encrypted websites, or at a minimum password protect files that contain your social security number or bank account numbers.
3. Check your credit report 3 times a year for free using www.annualcreditreport.com. This web service allows 1 free report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year so take advantage of it by obtaining one report every 4 months.
4. Monitor your FICO® Scores on a regular basis at www.myfico.com or through a FICO Score Open Access program. Find lenders who participate in this program at http://ficoscore.com/where-to-get-fico-scores/.

By the time you are seeking a mortgage, there is very little you can do to improve your FICO® score. Even if you pay off all your debt today, your credit score will not be restored in full because of the presence of past delinquencies on your record. Maintaining good credit is a lifestyle - monitor your credit, pay your bills on time, don't open lines of credit that you do not need, and keep your balance low! For more information on FICO® Scores, visit www.fico.com, or contact me!