Mortgage FAQ
4. What is a FICO score?
A FICO score is a credit score named after its developers, Fair, Isaac & Co. Credit scoring is a method of
determining the likelihood that credit users will pay their bills. Fair, Isaac pioneered credit scoring in
the late 1950s. Since then, scoring has become widely accepted as a reliable means of credit evaluation for
lenders to utilize. A credit score condenses a borrowers credit history into a single number in an attempt
at creating an "at a glance" summary of their borrowing profile. It is not know exactly how these scores
are computed, but the Federal Trade Commission has ruled it acceptable for the credit bureaus to keep their
computation methods confidential.
What is know about credit score calculation is that scoring models and mathematical tables assign points for
different pieces of financial information in order to predict future credit performance. The development of
these models required studying how thousands, possibly millions, of people use credit. Score-model developers
found predictive factors in the data that have proven to be fairly reliable indicators of future credit
performance. Models can be developed from different sources of data; for instance, credit-bureau models
are developed from information in consumer credit-bureau reports.
A credit score analyzes a borrower's credit history by considering factors such as:
- Late payments
- The amount of time credit has been established
- The amount of credit used versus the amount of credit available
- Length of time at present residence
- Employment history
- Negative credit information such as bankruptcies, charge-offs, collections, etc.
A FICO credit score is actually a combination score computed from data provided by each of the
three bureaus--Experian, Trans Union and Equifax. Some lenders use only one of the three scores,
while other lenders use the middle score.
Frequently Asked Questions About Credit Scores
Can I increase my score?
While it is difficult to increase your score over the short run, there
are things you can do to increase your score in the long run.
- Pay bills on time. Late payments and collections can have a negative impact on your score.
- Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
- Reduce credit-card balances. "Maxed" out credit cards affect credit scores negatively.
- If credit is limited, obtain additional credit. Insufficient credit can negatively impact scores.
What if there is an error on my credit report?
If you suspect an error on your report, report it to the credit
bureau. The three major bureaus in the U.S. are: Equifax (1-800-685-1111); Trans Union (1-800-916-8800);
and Experian (1-888-397-3742). All three have procedures for correcting information promptly. In some
cases, your mortgage company may be able to help you correct this problem as well.
