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Home Mortgage-FICO-What Exactly Is It? (Part 2)
In part one, we
saw the first components of FICO were:
The rest of the
components are:
DEBT
What lenders are
looking for here is basically the ratio of actual debt to the
approved amount of credit. This figure can give a measure of the
ability to pay and the degree of risk associated with a new loan.
The magic number is in the 25-30% range. Is the borrower
overextended?
Fair Isaac looks
at:
-
The amount owed on all
accounts and on different types of accounts.
-
Whether you are
showing a balance on certain types of accounts.
-
How many accounts have
balances?
-
How much of the total credit line is
being used on credit cards and other “revolving credit” accounts.
-
How much of
installment loan accounts are still owed compared with the
original loan amounts.
NEW CREDIT
People tend to have
more credit today and to shop for credit – via the Internet and
other channels – more frequently than ever. Fair Isaac scores
reflect this reality. However, research shows that opening several
credit accounts in a short period of time does represent greater
risk – especially for people who do not have a long established
credit history.
Multiple credit
requests also represent greater credit risk. However, FICO scores do
a good job of distinguishing between a search for many new credit
accounts and rate shopping for one new account. Your score takes
into account:
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How many new accounts
you have.
-
How long it has been
since you opened a new account.
-
How many recent
requests for credit you have made, as indicated by inquiries to
the credit reporting agencies.
Inquiries remain on your credit report for two years, although
FICO scores only consider inquiries from the last 12 months. The
scores have been carefully designed to count only those inquiries
that truly impact credit risk – see
How the
FICO Score Counts Inquiries for details.
-
Length of time since
credit report inquiries were made by lenders.
-
Whether you have a
good recent credit history, following past payment
problems. Re-establishing credit
and making payments on time after a period of late payment
behavior will help to raise a score over time.
Check out
www.myfico.com for a calculator
using current rates. There is a wealth of information at
www.fico.org.
Knowing what the
components of the FICO score are can lead you to getting a better
score and help you to avoid some costly penalties. A difference of
even a 100-200 points on your score can mean literally hundreds of
thousands of dollars in savings in your lifetime. Isn't that worth
the effort?
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