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What is a FICO Score?

FICO® Score is a credit score model from Fair Isaac Corporation that is used by all types of lenders to help assess the credit risk of individual consumers. It’s a three-digit number ranging from 300 to 850, where higher is better, and it’s been a standard since 1989.  Some industry specific scores (there are versions focused on car loans and credit cards) use a slightly broader range of 250 to 900.

FICO has created an algorithm to provide a score when you apply for a loan. The company updates it’s algorithm every few years. Since lenders are not required to use the latest version of FICO, it’s good to understand how the scoring methods differ from each other and how it can affect you.

To understand your credit score, you need to also understand what a credit bureau is.  If the names TransUnion, Equifax or Experian ring a bell, you may already know a little bit about credit bureaus. They’re the large companies that collect and store information about consumers’ financial lives and use this information to create credit reports. While the bureaus don’t actually make lending decisions, they sell credit reports and credit scores to banks, mortgage lenders, credit card issuers and other types of creditors.

Each of the three credit bureaus—Experian, Equifax and TransUnion—assigns consumer credit scores based on the information in their credit reports. This means someone may have a different FICO® Score among the different models and a different score from each of the credit bureaus.

How do I use the different FICO Scores?

The average person who is not in the midst of a specific loan transaction should focus their attention on the FICO® Score 8, because that’s the most commonly used score across various lenders.

You’re likely to have your FICO 8 pulled if you apply for personal loans, student loans or retail credit, and it’s possible your FICO 8 will be pulled in nearly any credit transaction, including an auto loan application.

Which FICO Score should you focus on for a mortgage?  Anyone who is hoping to get a home loan or refinance their mortgage in the next three to six months should focus on FICO® Scores 2, 4 and 5.

How to plan when you need to improve your credit

If you’re someone who would like to have a higher score, you may not know where to start. Fortunately, the main steps you can take to improve your credit will help no matter which version of your score is pulled.

The first step anyone can take to improve their credit is getting any delinquent accounts they have into current status. For the most part, this means catching up with the minimum payments on your bills so they are no longer listed as currently “late.”

Your score is still going to be on the lower end of the range if your history shows a delinquency, but being delinquent now is much worse.  And it’s an almost mandatory step before you can even hope to get a decent loan.

From there, paying bills on time is critical to generating a good score. You will also want to look at our overall debt load, including your total debt and how much of your available credit you’re using. If you are maxed out on credit cards, that will definitely impact your score.  Try to reduce those balances.

If you are thinking about obtaining a mortgage, work with a lender right away, even if you think you can’t qualify.  Work with one who has access to credit simulators to help improve your score so that you aren’t doing anything blindly.  Believe it or not, sometimes paying off a collection account can make your credit worse!  We know lenders like that, so contact us and we can direct you to the right people.   

Other factors to pay attention to include the length of your credit history as well as your pursuit of new credit and your credit mix.

Next steps

While each lender and type of loan determines what is an acceptable score for credit, most lenders will consider FICO Scores in the upper 600’s and greater to be acceptable.  You’ll have a better chance at qualifying for the best loans and best rates if you can get your score in the mid-700’s or higher. This is above the average of U.S. consumers and demonstrates to lenders that you are dependable.

One important thing to know about FICO 8 is that it’s more sensitive to a high percentage of usage of a credit line than older versions of FICO. We recommend that you stay under 30% credit utilization to keep your FICO 8 score from dropping due to high utilization.

On the other hand, FICO 8 has positive changes for consumers as well. Accounts in collections with balances under $100 are now ignored by your FICO score. Previously, all collections accounts were factored into your FICO score, no matter how small they were. Additionally, FICO 8 is more forgiving to one-off late payments of 30 days or more when compared to previous versions of the FICO model as long as all other accounts are in good standing.

FICO 8 vs FICO 9: What Are the Differences?

FICO 9 is similar to FICO 8 except when it comes to collections and rent payments. FICO 9 counts medical collections less than other accounts in collections.  Also FICO 9 ignores accounts in collections that have a zero dollar balance. If you had a credit card account go to collections but later paid it off, FICO 9 will no longer use said collections account against your score. This is different than FICO 8, which factors all collections amounts of $100 or more into your FICO score—even if they’re completely paid off.

Remember though, just because collections with a zero balance are ignored by FICO 9 does not mean that lenders will ignore them. Credit bureaus will still show these collections on your full credit report, and lenders will see them when they reviews your full credit history.

Finally, FICO 9 factors rental history into your credit score. This makes it easier for people with no credit to build a high credit score with their monthly on-time rent payments. This is dependent on your landlord actually reporting rent payments to credit bureaus which is something we don’t see a lot of, especially when it comes to smaller, private landlords. 

Most lenders have yet to adopt FICO 9 since it’s still new to the market. This will change as time goes on, so start monitoring your FICO 9 score now to ensure you don’t encounter any surprises as the years go on. You can pay to view your official FICO 9 score on FICO’s official credit monitoring service. Unfortunately, there is no one offering a free FICO 9 score at this time.

What Are Older FICO Models?

But lets go back to mortgages.  Older versions like FICO 2, 4, and 5 are still used by the mortgage industry when assessing creditworthiness for new mortgages and deciding on interest rates.

FICO 2, 4, and 5 are very similar. The main differences between the three is that 2, 4,and 5 use data from Experian, TransUnion, and Equifax respectively. Mortgage lenders pull one of each and compile the reports in a document called a Residential Mortgage Credit Report. Duplicate data is screened and removed, and the middle score of the three is picked to represent your worthiness to pay back the mortgage.

FICO 8 and 9 use data from a single credit bureau, so using FICO 2, 4, and 5 together gives mortgage lenders a more complete view of your creditworthiness because they can see the history of every account you’ve opened. This is especially helpful for mortgage lenders as many creditors don’t report account history to all three credit bureaus.

How Does FICO Differ from Other Credit Score Models?

VantageScore is another popular credit scoring model. Like FICO, VantageScore 3.0 grades credit on a 300 to 850 point scale and takes credit utilization, credit inquiries, and on-time payments into account. The two models differ in a few ways, with one major difference. FICO penalizes all late payments the same way, while VantageScore penalizes late mortgage payments higher than other late payments.

FICO and VantageScore also differ in how they handle combining similar credit inquiries. With FICO, you have a 45 day grace period where similar credit inquiries for auto loans, mortgages, and student loans are combined into one inquiry. VantageScore gives you a smaller 14 day grace period, which can make comparison shopping for loans harder.

Fortunately, there are multiple ways to get a free look at your credit score. For example, Experian offers a FICO Score 8 with its free credit monitoring service. Many lenders participate in the FICO® Score Open Access program that enables them to provide their customers with access to their FICO Score for free.  Along with the FICO® Score, lenders also share insights into the score and credit education content to help customers understand their credit health.

And don’t forget about annualcreditreport.com   Federal law allows you to get a free copy of your credit report every 12 months from each credit reporting company and this web site helps you do it safely and at no cost. 
This article is fairly basic, so if you want more information about getting a mortgage loan, please let us know!  We will connect you to a lender that we know and trust who can look at everything with you, and provide you guidance if you need some. 

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