Understand Your FICO Score and Win Big!

When reviewing mortgage applications the information lenders look for first and count on the most heavily is the applicants FICO score. This score is what a loan officer uses in deciding how credit worthy an applicant is. It also has great influence over the terms offered with a loan. Lenders look for a high FICO score because they know that higher scores generally mean less risk for them. Low-risk applicants can count on better rates and loan terms.

How a FICO score is calculated is a proprietary industry secret held in the strictest confidence. However, the FICO corporation has made available a general outline of what information they use in the credit scoring process. Knowing what makes up a FICO score empowers consumers to raise their scores by handling credit appropriately. Here is a list of the factors used in calculating a FICO score, including how important each kind of information is to the formula:

The most influential factor is ones payment history. This looks at the individuals history of making payments on credit accounts, and lowers the score for each late or missed payment. This factor is weighted at some 35% of ones FICO score.

Credit Used and Available Credit: This is an important ratio to a lender and it makes up 30% of your FICO score. Having plenty of available credit will raise your score. Also, paying down loans regularly but not closing them, and paying down your open revolving credit cards will increase the score. However, closing revolving credit accounts will lower the score.

Length of Credit History: This information counts as 15% of your FICO score. This factor is important because it can shows how a borrower has behaved in the past and is a pretty good indicator of how they will behave in the future. If you have a long credit history your score will be higher, while those just starting out will have a lower score in this area.

Credit Diversity and Credit Inquiries: At 10% each these factors are still an important part of your score to understand. If a consumer has handled diverse kinds of credit appropriately it impacts the FICO score positively. However, if there are many inquiries into a persons credit the score will go down. The number of recent inquiries gives a lender a look at an applicants current financial picture, which is vital information when extending credit.

Knowing these factors and their relative weights can help the potential borrower modify their behavior in order to get a higher FICO score and hopefully more favorable terms for their loans.

Wendy Polisi is the founder of Finance the Dream which offers Rent to Own Homes and Lease Options throughout the United States. To find out more about how they can help you get into your dream home, please visit them at financethedream.com. To learn more about increasing credit score, please visit her blog.

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