What is in a FICO Score?

While the exact formula that is used by the three credit bureaus (Experian, Trans Union and Equifax) is a closely guarded secret, we do know enough in order to take action that will give a desired result. When getting prepared for a mortgage approval you want to put your best foot forward. While there are several factors that are considered, the credit score is probably the first criterion that is looked at. In some cases it can make a difference between getting approved, or getting a better rate.

Let’s take a look at how the credit score is derived:

Payment History (35%) is the most important factor that a lender will look at. Simply, does the borrower have a history of paying accounts on time? Activity that is recent has more weight than older activity.

Amounts Owed speak to how a borrower manages credit balances. Especially with revolving/credit card accounts, balances ideally will be no more than 30% of the credit limit. Balances that are 50% or more of the credit limit are a drag on the credit score. On installment accounts the balance remaining vs. the original balance is a factor as well.

Length of the Credit History (15%) generally gives a benefit to a longer credit history, not only how long an individual has had credit but also the individual accounts, and how long they have been used. For example, a credit card that has been used for years without a late payment will get more points.

Types of Credit in Use (10%) looks at the mix of account types a borrower has. It reflects on the ability to manage different types of debt. It does not benefit a borrower to open an account unless it will be used. Credit cards used responsibly are a good way to increase a credit score in a relatively short period of time.

New Credit (10%) reflects on how many new accounts have been opened in a short period of time. Opening many accounts at once does represent a credit risk and can hurt the credit score. Inquiries generally do not affect the credit score, and when they do it’s negligible. However, you should consult with your loan officer before opening any new accounts. Inquiries do allow for shopping, such as multiple inquiries in a 45-day period with many car dealers while shopping for a new vehicle.

Part of what I do is counsel people looking to get a better credit score over time. As each case is truly unique we need to go over your individual case and I can lay out a plan to get the desired result, and give a pretty good idea of the time needed to accomplish your goal. Even if it takes six months, the known is better than the unknown, and we’ll have a plan in place to get you to the desired loan together.

John Lyng is a Mortgage Loan Officer with Supreme Lending. He is experienced with traditional bank programs, as well as alternative programs to help people get into their home. John has a varied background in working with mortgage banks and non-profits, and believes in guiding families to prepare for affordable homeownership.

If you have questions about this or any mortgage-related topic, please contact John Lyng directly at 214-862-3579, or send an email to John.Lyng@SupremeLending.com.