One of the tools that lenders use to evaluate the borrower to repay a loan is what’s known as their FICO score. Their scoring programs are a standardized approach to help lenders make loan decisions in an efficient manner.
FICO scores can range from 300 to 850 with 850 being the maximum possible score. According to the FICO scoring system there are five factors that determine a borrowers score:
- A borrowers payment history carries the most weight – Late payments on bills including a mortgage, credit card or automobile loan, can cause a consumer’s FICO score to go down. Paying your bills according to the contract you signed will over time help improve a consumer’s FICO score.
- The borrower’s current credit limits and use – The ratio of current outstanding debts such as credit card balances to the total available revolving credit (your credit limit). You can improve your FICO score by paying off debts and lowering your utilization ratio. The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on your FICO score.
- The borrower’s credit utilization – As your credit history gets longer, assuming you pay your bills on time; it can have a positive impact on your FICO score.
- The types of credit used (installment, revolving, or consumer finance) – There is some credit given to having a history of managing different types of credit.
- A recent search for credit or amount of credit obtained recently- If you have multiple credit inquiries as a consumer seeking to open new credit, such as credit cards, retail store accounts, or personal loans, it can hurt your score. Applying for lots of new credit in a short period of time is also viewed as risky and can cause a drop in an individual’s score. What should be noted however, if you are shopping for a mortgage or auto loan over a short period of time you should not experience a decrease in your scores as a result of these types of inquiries. So if you are buying a home and apply to multiple lenders and they all do their credit checks you are not supposed to be penalized.
FICO scores do not take into account a borrowers salary, employment history, where they work, rental agreements, child support or other such obligations or interest rates on any current loans.
Generally speaking a credit score that is over 720 is often considered an excellent credit score. A score of 680 – 719 is considered good. A score in the range of 620 to 679 will usually make the lender scrutinize the file further. Having a score between 585 and 619 will typically disqualify you from getting the best rates. A score below 584 will make many lenders question whether or not they want to do business with you.
If you live on Maui in Kihei, Wailea or Makena and have more questions about FICO scores or credit please contact me using the Contact Form.