When you apply for a mortgage, your lender runs a credit report. A key component of the report is your credit score. One of the most commonly used credit scores in the mortgage industry is FICO.
In this article, we describe what FICO is, how it is measured, how it is used when approving you for a mortgage, and steps you can take to maintain and improve your credit score.
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FICO is a credit score created by the Fair Isaac Corporation (FICO). The FICO company specializes in what is known as “predictive analytics,” which means they take information and analyze it to predict what might happen in the future.
In the case of your FICO score, the company looks at your past and current credit usage and assigns a score that predicts how likely you are to pay your bills. Mortgage lenders use the FICO score, along with other details on your credit report, to assess how risky it is to loan you tens or hundreds of thousands of dollars, as well as what interest rate you should pay.
“Lenders use the FICO score, along with other details on your credit report, to assess credit risk and determine whether to extend credit and what interest rate you should pay.“
– Chad Whistler, Mortgage 1 Loan Officer
FICO scores are used in more than 90% of the credit decisions made in the U.S. Having a low FICO score is a deal-breaker with many lenders. There are many different types of credit scores. FICO is the most commonly used score in the mortgage industry.
A lesser-known fact about FICO scores is that some people don’t have them at all. To generate a credit score, a consumer must have a certain amount of available information. To have a FICO score, borrowers should have at least one account that has been open for six or more months and at least one account that has been reported to the credit reporting agencies over the last six months.
FICO scores range between 300 and 850. A higher number is better. It means you are less risk to a lender.
Scores in the 670-739 range indicate “good” credit history and most lenders will consider this score favorable. Borrowers in the 580-669 range may find it difficult to obtain financing at attractive rates. Less than 580 and it is difficult to get a loan or you may be charged “loan shark” rates.
The best FICO score a consumer can have is 850. Fewer than 1% of consumers have a perfect score. More than two-thirds of consumers have scores that are good or better.
Here’s a breakdown of scoring ranges and what they mean:
A FICO score take into account five areas to determine the creditworthiness of a borrower:
To determine credit scores, FICO weighs each category differently:
Here are some things that FICO says it does not factor into its scores:
Here are tips for maintaining and improving your FICO score. The time it takes to improve your credit score depends on the reason your score needs boosting in the first place. If your score is low because you don’t have much credit history, your score can be boosted within months. If your score is low for other reasons, boosting it can take longer.
Here’s how different actions can negatively affect your credit score and for how long:
Action | Avg. Recovery Time | Credit Score Impact |
Applying for Credit | 3 months | Minor |
Closing an Account | 3 months | Minor |
Maxing Out a Credit Card | 3 months | Moderate |
Missed Payment / Default | 18 months | Significant |
Bankruptcy | 6+ years | Significant |
“Keep your credit card balances well below their limits. Maxing out credit cards, paying late, and applying for new credit all the time will lower your FICO score.“
– Chad Whistler, Mortgage 1 Loan Officer
Have questions about FICO or anything else mortgage-related? Call us at 1-866-532-0550 or locate a Mortgage 1 loan officer near you to get the process started using our digital mortgage app. It’s fast and easy!