How do FICO Scores Work?


Home buyers should be treated as more than a number, however the one number that affects home buying more than anything else is the credit score.


What’s in a number?

Credit scores provide the best guide to future risk based solely upon credit report data.  The higher the score, the lower the risk.  The name FICO comes from Fair, Issac and Company who were the pioneers of this technology.  While most lenders use credit scores to help them make lending decisions, each lender has it’s own strategy, including the level of risk it finds acceptable.  This is an important reason to use a Mortgage Lender who regularly works with a variety of lenders and can place any given loan with the appropriate bank for the best results.


Weighted Elements in Credit Scoring

35% Payment History

The most important factor to any lender is whether the borrower has paid past credit accounts on time.


30% Amounts Owed

Owing money on several accounts doesn’t mean a borrower is a high-risk.  However, owing a lot of money on many accounts, may be an indication that they are overextended and more likely to make some payments late.


15% Credit History

A longer credit history will increase the score.  The score evaluates both the age of the oldest account and the average age of all accounts.  It also considers how long it has been since the borrower used certain accounts.


10% New Credit Inquiries

Opening several credit accounts in a short period of time represents a greater risk.  This extends to application or requests for credit , as indicated by inquiries to the credit reporting agencies.


10% Types of credit used

This evaluates the kinds of credit accounts the borrower has and how many of each.  Finance Companies are considered to be “lenders of last resort” and accordingly are treated as higher-risk.


What Lenders Want

For mortgage loans, lenders want to see a minimum of three accounts opened for two or more years.  At least one installment account (ie: a car loan) and two or more revolving or other types of credit.


We will address each of theses elements in greater detail in the other articles.  Watch for these reports.


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