Your FICO credit score is without a doubt the single most important factor in getting approved for a home mortgage loan. Forget everything else you think matters.
As the standard credit score in the U.S., your FICO score holds an incredible amount of weight over the terms and conditions (interest rate, etc.) that a lender may offer you when applying for a mortgage.
But your FICO score is much more than just a number—it’s an ever-changing, economic indicator on your ability to follow through with the terms of your mortgage. In short, it’s how lenders know you’re good for the money you’re about to borrow.
Who Calculates Your FICO Score?
FICO, or Fair, Isaac and Company, is a California-based company that provides software to calculate a person’s credit scores—aka your FICO scores.
Your FICO scores are calculated using information credit bureaus such as TransUnion, Experian and Equifax have included in your credit reports. These reports contain the information that each credit bureau has on file about you—such as where you work and live, how you pay your bills, and whether you’ve been sued, arrested or filed for bankruptcy.
“FICO scores are used in more than 90% of lending decisions”
Your score can range anywhere from 300-850. A FICO score in the 700s will put you in good standing and makes it easier to obtain a loan, whereas lower scores affect your ability to borrow. But don’t think of your FICO score as a figure that is set in stone—it can actually change daily. Think of it as a fluid snapshot of your credit record when a lender pulls your credit report—think of it as a number constantly in flux. How it changes from day to day depends heavily on a number of factors.
How Your FICO Score Is Calculated
When a lender uses the generic term “credit score,” what they are really talking about is your FICO score. As mentioned earlier, FICO scores are calculated from many different pieces of credit data in your credit report. This data is grouped into the following five categories:
- Payment History—A lender will naturally want to know if you’ve kept up with your bills, as this is easily the best indicator of whether someone will default on a loan or not. Paying your bills on time is key to having a crystal clear credit history. This is one of, if not THE, most important factors in your FICO score.
- Length of Credit History—The longer your credit history the better your FICO score. In some cases, however, a borrower with fledgling credit may have a high score given the rest of their credit report. This factor generally includes: how long your credit accounts have been established—namely the age of your oldest account and newest account, as well as the average age of all your accounts, etc.
- New Credit—How many new accounts, as well as what type of accounts, is another important part of your FICO score. The amount of credit accounts you open in a given period of time can also have a major impact on your FICO score because it lowers the average account age and further represents that you may be a greater risk than other borrowers. This factor is important, but not nearly as crucial as those mentioned above.
- Type of Credit in Use—Think of all the different types of credit accounts you have and now ask yourself whether it includes a healthy mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Having a mixture of credit accounts helps a lender determine your overall credit profile.
Four Ways to Raise Your FICO Score
The good thing about your FICO credit score, as mentioned earlier, is that it’s fluid—meaning little tweaks here and there can help change it for the better. The following are a few insider tips you can use to better your credit score:
Keep your credit balances low
- Using too much of your available credit can lower your FICO score significantly. Keep your credit card balances below 20% utilization. Do your best not to max out cards.
- If you do have multiple credit cards, spread your spending out across all of them—not just one.
ALWAYS pay on time!
- Even if it’s just the minimum, make sure you pay your bills when they are due each and every month.
- Delinquency, the severity of that delinquency and the time passed since your last delinquency, all weigh heavily on your credit score.
- If you have any public records (bankruptcy, judgments, liens, etc.) on your report, be sure to clear those up as soon as possible.
Keep accounts active
- Don’t close your old accounts—especially credit card accounts. This affects your total credit utilization, as well as your average age of accounts.
- Even if you’ve transferred the balance of one credit card to a new account, be sure to keep that old account active. A simple way to keep an account active is to use it for small recurring purchases, such as gas or coffee.
Double check your credit score
- Every borrower should go through their FICO score with a fine-toothed comb. It would be a shame to let an error adversely affect your overall score and therefore impact your chances of getting a mortgage.
- Take action on any errors.
At LeaderOne Financial, we understand that your credit is incredibly important to your ability to borrow money and at what rate. That’s why we’ve also come up with these great tips on how to secure a home loan with less than stellar credit. Don’t hesitate to contact us today to learn about ways of preparing your credit further before applying for a home mortgage loan. We’re always happy to help.