Credit Fico Score - The Truth about Credit Ratings and Credit Fico Score

The Truth about Credit, Credit Ratings and Credit FICO Scores

FICO Scoring or Credit Scoring is a means of applying a highly advanced mathematical algorithm model to your entire credit history, credit behavior, and credit payment history. It's a way to gauge more accurately how great or less of a risk you represent to any credit lender, including mortgage loan lenders.

Although there are dozens of different scoring models being used, the most well known company in the FICO Score and Credit Scoring business is Fair, Isaac and Company.

FICO Score - A Model of You

FICO Scoring and Credit Scoring models like the one created by Fair, Isaac have always been shrouded in mystery, especially when it comes to the specifics. Generally speaking, though, they evaluate your credit history, income, outstanding debt and debt utilization over the years, access to credit, and other indicators of your credit behavior to determine how likely you are to pay your bills on time, or if at all, and to determine the your credit risk.

A FICO Score or Credit Score is a numerical score typically ranging from 300 to 850, with the low end of the scale indicating a poor or high credit risk. This is usually what a Mortgage Loan Lender will use to determine whether or not they’ll lend to you. For example, a FICO Score or Credit Score of 620 is frequently cited as the "minimum point" for loans which can be funded by Fannie Mae and Freddie Mac. FICO Scores and Credit Scores below this are usually funded by private "sub-prime" lenders, where rates are higher.

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FICO Score - What's in your score?

According to Fair, Isaac, the breakdown of FICO Score or Credit Score is as follows:

35% of the FICO Score is calculated by payment history on all credit accounts, with the most recent history weighing more heavily than the past;
30% is calculated upon the amount of credit debt you have outstanding with all creditors;
15% is calculated on the basis of how long you've been a credit user (a longer history is better);
10% is calculated from the most recent credit history;
10% is calculated from the mix of outstanding debt or credit, including installment loans, leases, mortgage loans, credit cards, etc

Other models being used are sure to utilize these in various weightings, plus other credit data that may be entered in to the model. These additional items might include your address, zip code, how often you've moved and any other public and private information.

FICO Score - What It Means?

So, now you've got a FICO Score or Credit Score. Why should you be concerned or care about this? Increasingly, mortgage loan lenders are trying to fund loans with prices (interest rates, loan fees and loan terms) that more precisely match the FICO Score or Credit Score risk. In theory, someone with a 850 FICO Score, should get much better mortgage interest rate than someone with a 650 FICO Score.

So far, though, it hasn't exactly worked this way, at least not that perfectly. There are several grades of credit which have arisen, most notably below the 620 FICO Score line (B – D Credit). But above the 620 FICO Score line, everyone pretty much pays the same in interest rates and mortgage loan fees. Mortgage lenders usually will penalize for poorly managing credit, but don't much reward for effectively and wisely managing credit debt, or at least so far.

More Information on FICO Scores and Credit Scores can be located here.

Read here for more information on FICO Scores and Credit Scores

FICO Score - Why Score At All?

It's not as though the credit consumers have been clamoring for some sort of number, so why are we even going though this process for each loan? In the past, mortgage loans have been combined and pooled together for sale on the secondary mortgage market, with these pools containing a range of all credit risks - all usually good, but some better than others, and some worse than others. Some credit borrowers would be more likely to pay off their mortgage loans early, and others might fail to make timely monthly payments at all. The securities derived from these pools each carried a different known level of credit risk to the mortgage investor, which made holding and hedging these as a part of an investment portfolio a bit of a complicated business.

It's long been the desire of most investors to be able to pick and choose mortgage loan portfolios to add or remove risk to a larger investment portfolio. With known risk, a greater standard of performance could be assured. Investors willing to pay more for a greater standard of precision, and began pressing the mortgage loan industry to adopt a means to achieve it. Hence, FICO Scores and Credit Scores; now, an investment seller can put together a portfolio of mortgage loans for sale that aren't from the wide pool of different credit risks, but rather from a very specific type or kinds of borrowers, all with FICO Scores and Credit Scores are closer together to each other.

FICO Score - Who Really Benefits?

FICO Scoring or Credit Scoring is actually a great idea, at least in black and white, and on paper, and some ways in practice, too. The sub-prime mortgage loan lending industry (the borrowers with the “not so great” credit or “challenged credit”) would not have been created without it. Certain borrowers have seen an expansion in the credit available to them, with more mortgage competitors fighting for their business, lower interest rates and more options in mortgage loan products. It's safe, however to say that thousands of homeowners have FICO Scores and Credit Scores to thank for their opportunity to obtain a mortgage loan. FICO Scoring and Credit Scoring is helping to make mortgage loan approvals quicker, easier and more convenient for all types of mortgage loans. At least so far, however, only the consumers at the bottom of the scoring scale have seen significant rewards for the implementation of FICO Scoring and Credit Scoring on a wide basis in mortgage loan lending.

FICO Score - What's Bad about Scoring?

Basically, the secrecy. In the old days of mortgage loan lending, you may have been judged by a mortgage company, mortgage underwriter or mortgage committee who used some subjective evaluation process to evaluate you, a process which may have been arbitrary. You didn't know what they preferred to see in a borrower, so you would apply for the loan and hope that you received an approval. Especially in the last 25 years, more and more information has been added into the mortgage underwriting process, and this knowledge has turned into borrowing power for the consumer. Knowing where they stood in a mortgage loan lender's criteria, potential mortgage borrowers went from one place to another place in search of the best mortgage loan.

Once interest rate pricing and mortgage underwriting were determined by FICO Scores and Credit Scores, much of the leverage achieved by the consumers was returned to the mortgage lender, and FICO Scoring and Credit Scoring became the high tech way to draw a black curtain between the borrower and mortgage loan lender. Since the FICO Score and Credit Score information would not be released to consumer, the power in interest rate and fee pricing then was returned to the mortgage lender. Armed with a FICO Score or Credit Score, the mortgage lender knows precisely everything thing they need to know.

For some mortgage loans, mortgage lenders have stopped even providing interest rate quotes when you call. The mortgage loan lender wants you to fill out a loan application first, so they can obtain the FICO Score or Credit Score.

Fair, Isaac and several of the major credit bureaus now offer credit reports which include a FICO Score or Credit Score, but they aren't free, of course.

Get started on Mortgage Loan Application today, regardless of FICO Score!!!

Click here to apply for our Low FICO Score Mortgage Loan Application

FICO Score - Why All the Secrecy, Anyway?

It has always been a competitive stance by Fair, Isaac not to release FICO Scores or Credit Scores. It's simple enough to understand that once that Fair, Isaac proved that credit scoring works, that the other competing credit models would be developed. They are, including entries from the major credit bureaus (IE… the "Beacon Score" by Equifax, and many others), and Fannie Mae and Freddie Mac may score mortgage loans utilizing their own model, as well.

But there's a good reason why they have resisted telling the consumers about their FICO Scores or Credit Scores and what goes into calculating them. The FICO Scoring and Credit Scoring model really depends upon consumers going about their business as usual, paying or not paying the bills on time, opening credit lines and getting revolving credit cards as they normally would. If you knew that closing out a Visa card account you rarely use might increase your score by a certain amount, you would surely close the account. That change in credit behavior, repeated millions of times would distort or destroy the FICO Score and Credit Score model, rendering the scores and scoring process worthless.

Fair, Isaac has claimed that revealing the FICO Score to a consumer would simply confuse the consumer even further, and that the FICO Score by itself isn't useful without proper understanding of the evaluation process.

FICO Score - Scores Cause Overcharging?

Because you may not know how you appear or what your FICO Score or Credit Score is, you might be charged in excess of what you might otherwise be made to pay. FICO Scoring and Credit Scoring may have helped the implementation of the "predatory lending" law, a law designed and created to protect a borrower - especially the less sophisticated mortgage loan borrowers. Helping them to not fall into the trap of an unscrupulous mortgage lender. This can occur especially in cases where a borrower fails to shop for a mortgage loan, and happens largely in the lesser educated areas, and among the poor and elderly.

While a borrower might have pretty good credit and a decent FICO Score or Credit Score, the salesperson might only offer them loans with high interest rates, mortgage loan fees, or both; not knowing that they might get better elsewhere - and lacking both the FICO Score or Credit Score information and understanding of the credit scoring process - the borrower signs on for the mortgage loan. If the borrower had access to their FICO Score or Credit Score and a little knowledge of the mortgage loan lending process, they could search more aggressively.

The secrecy which has surrounded FICO Scores and Credit Scores is inherently anti-consumers. Borrowers have the right to know how a potential mortgage lender sees them and have an opportunity to present themselves in the best manner possible.

FICO Score - What's New?

Enough pressure built up around this issue that most regulators and even legislators got into the act. At one point, Congress even considered implementing the "Fair Credit Full Disclosure Act" (H.R. 2856), sponsored by Representative Chris Cannon (R-Utah) which mandated the release of your FICO Score or Credit Score. California actually passed a law which requires that FICO Scores and Credit Scores be made available to borrowers. It was that that kind of pressure that led Fair, Isaac to begin a new program that allows consumers to have access to their FICO Scores or Credit Scores, so the federal bill was ultimately dropped.

In the meantime, if you are applying for a mortgage loan, you can certainly ask what your FICO Score or Credit Score is. FICO has stated that it has no specific objection to providing you with the number as part of a financial transaction.

More Information on FICO Scores and Credit Scores can be located here.

Read here for more information on FICO Scores and Credit Scores

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