What’s In Your Credit Score? You May Think You Know. Truth Is, It’s Always Changing.
As time impacts changes in technology, these changes trickle into sectors including real estate, financial services, and mortgage banking. These three sectors heavily consider the FICO score as critical for underwriting and transactional processes. Years ago, prior to the economic challenges the US suffered, a FICO score of 680 was considered good. However, today, a FICO score of 720 is now considered the cut-off where lenders begin measuring risk overlays. And this leaves many wondering what exactly goes into a credit score?
And with recent these changes to technology and information, consumers have demanded more transparency so that they can better understand the variables impacting their FICO scores, and to what degree each actually impacts the score. As a result, vendors who build the models to derive FICO scores have begun providing some guidance and a hint of transparency to the composition of a FICO score. For example, a new FICO model announced that it would use data from CoreLogic which gives weight to public data on borrower-specific accounts such as cell phone accounts, landlord/tenant history records, and other property data found in the public domain. CoreLogic has stated that this new model would actually impact most consumers positively by roughly 1-3% in their FICO score. The point is that the FICO model constantly changes, and what was once a variable may not be as heavily weighted today comparatively. Years ago, cell phone accounts were not even considered into the FICO modeling.
Generally, a FICO score takes into account past payment history, current payments, deferred accounts, outstanding debt balances in proportion to the available limit, recent applications to open new debt (e.g. loan applications, credit card applications), the relation of revolving due versus installment debt, and the overall management of personal finances. The more payments made on time, the better the score. The less debt compared to available credit, the better the score. Also, public records such as judgments, liens, and collections have an impact on the FICO score. With time, the significance of such accounts diminishes, as more recent accounts and pay histories become more important than said older accounts.
Vendors and bureaus generally want to see a 40:60 ratio between outstanding balance to available limit. So if you are above 40% of your available limit on a credit card, your score may be weighed down. You will also want to always pay on time (obvious but must be stated). Numerous credit inquiries within a short period of time also impact scores; so if you have applied for numerous credit cards in a short period of time, realize that the lender pulls a credit report each time to assess your viability as a credit card holder to them. So being responsible with applying for debt/credit is also important.
And lastly, your FICO score determines how much you pay in interest, your access to credit, a
Long Term Guidance: We advocate proper financial management. This means you need to know your credit score, along with the positives and the negatives, in order to improve it. That’s the key to a lifetime of low interest and access to credit.
Copyright © 2012 MortgageLoan Corp.