Most people have heard the term FICO Credit Score, but what does it actually mean? Well, most are still confused as to what it actually is and how it would affect them when they try to obtain a mortgage. Here are a few guidelines on understanding FICO scores and how it can affect the amount of interest you pay on your loan.
What is a FICO Credit Score?
A FICO score is a credit grade of a borrower, based on credit history as reported to 3 separate credit reporting agencies. It is based on a number of factors, including the amount of credit a person has, payment history, late payments, judgments, loan defaults and other factors.
A mathematical formula developed by Fair Isaac Corporation is used to grade the credit risk the borrower represents. Scores range from 350 to 850. A score of 650 or better is considered good and a score above 750 is considered excellent.
Does a FICO Credit Score Affect a Mortgage Rate?
Mortgage interest rates are calculated in part, on the amount of risk the borrower represents. Thus, the higher the risk the borrower presents, the higher the interest rate the lender must charge to account for the risk. With FICO scores, the lower the score means a higher risk, and thus, less favorable mortgage terms. As a result, those with low FICO scores may have difficulty finding a mortgage.
Is a FICO Credit Score Permanent?
No. A credit score will change depending on the borrower’s credit history. Therefore, a borrower with a lower score can increase it over time by taking certain steps to improve it.
Should one decide to improve his/her credit score, first step would be to obtain a credit report. Then, it should be reviewed for accuracy and any incorrect entries must be reported. Outstanding judgments, if there are any, should be paid. And finally, paying down revolving credit card debt must also be considered as this also can help in your credit repair strategy.
For more detailed information, please contact your lender or loan officer.