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FICO scores 101

by Alison Stanton on Jun 5, 2015

New-home shoppers often hear references to their FICO score when they apply for a loan. As Carrie Toppenberg, mortgage loan officer at Peoples Mortgage in Gilbert noted, a FICO score, which is created and calculated by the Fair Isaac Corporation, measures a person’s credit.

“It is a summary of someone’s credit report,” she said, adding that it is the most widely used measurement of creditworthiness. “The FICO score looks at positive and negative information from a person’s credit report. The score consists of a person’s payment history, amounts owed, length of credit history, new credit and types of credit used,” she said.

Overall, Toppenberg said, the payment history is the most important factor in the FICO score.

Impact on interest rate

Chad Stallings, a mortgage banker at Arizona Mortgage Specialists in Tempe, said having a lower score can adversely affect a borrower’s interest rate and limit the person’s availability to certain loan programs. 

“For example, Fannie Mae has a risk-based pricing system that in its simplest form means the lower your credit score, the higher your interest rate due to the higher risk associated with your loan,” he said. “They are using your credit history to determine how one will most likely act in the future as far as paying their mortgage. FHA does not necessarily employ this risk-based pricing and will allow for lower credit scores than Fannie Mae or Freddie Mac, but does offset any perceived risk in other ways, such as requiring more mortgage insurance with their loans then Fannie or Freddie.”

Since creditors do not want to take risks, Toppenberg said the best interest rates will be given to those with the highest FICO scores. “A drop in your score could impact the deal all together,” she said.

Boosting your score

In order to improve a FICO score, Toppenberg and Stallings recommend the following tips:

  • Keep credit card balances at 50 percent of the credit limit or less
  • Pay down high-balance cards or installment loans
  • Don’t close out all of your cards; this can have an adverse effect on your scores
  • Keep credit inquiries to a minimum; they hurt more if you actually obtain credit
  • Whenever possible, pay cash
  • Make payments on time
  • Don’t make sudden changes in your normal pattern of making payments; for example, do not start paying a lot less on credit card payments or charge more on your cards

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