FICO Statistical Model:
Confused by what really goes on with your FICO score? Join the crowd. We all know the importance of a good FICO score when getting loan but how much do you really know about what a FICO score is? A FICO score, which is used by mortgage companies to determine your loan terms, is a term for a credit bureau score and specifically refers to the score derived from the complex FICO statistical model (see the MyFICO website for further details).
The Credit Bureaus:
A credit bureau, like Trans Union, score measures the relative size or degree of risk a potential borrower represents to the mortgage lender or investor. Each of the three major credit bureaus have their own scoring method, or statistical model, for calculating scores. To get the lowest home loan mortgage rate from a mortgage company you need to have excellent credit based on their calculations of credit scores. The bureaus rely exclusively on their own informational data for calculating these credit scores. The credit bureaus and their respective credit models are:
•Equifax/ Beacon model
•Trans Union / Emperica model
•Experian/ FICO model
The well-known company of Fair, Isaac & Co. (FICO) began its advanced work with credit scoring in the 1950s. Since the 1950’s, credit scoring has become widely accepted by mortgage lenders as a very reliable way of credit evaluation. A credit score attempts to bring a borrower’s credit history into a single number that is easy to understand. Fair, Isaac and the credit bureaus do not reveal to those in the lending business how these credit scores are computed.
“Reason Codes” are included in credit reports and help explain why a credit report scored as it did, the weight given to factors making up the score, and where a consumer should direct their efforts toward increasing their score. The reason codes and their respective weights are:
- Late Payments, Collections, Bankruptcies–40%
- Outstanding Debt–30%
- Length of Credit History–15%
- Types of Credit–15%
So how can I increase my score?:
It is difficult to increase your score over the short run (unless you have errors), here are some simple tips to increase your FICO (or general credit) score over of time.
- Pay all your credit bills on time. Late payments and collections can have a serious impact on your score.
- Reduce (below 50% of your credit limit) your credit-card balances. If you always have high balances on your credit cards, your credit FICO score will be negatively affected.
- If you have limited credit, obtain additional credit.
“If several companies check my credit, will that hurt my score?”:
That depends on who it is. The credit scoring system has changed to be more forgiving in this area. Several inquiries over a short period of time will not hurt your credit score if they’re from a mortgage lender. They (the credit scoring companies) realize that when a borrower is shopping for a rate, their credit may be investigated by more than one lender. Now if you go out and apply for 5 credit cards then yes you may see a hit to your credit score. If you have additional questions about FICO score and your general credit standing please be sure to contact us directly at 1-800-550-5538.