Have you ever heard of the term ‘FICO' in reference to credit scoring? You might be asking yourself, ‘What is a FICO Score?'
A FICO score is a credit score developed by Fair, Isaac & Co. (F.I.CO). Credit scoring is a method taking criteria from a person's history of spending and bill paying and determining a scale to offer prediction of the likelihood that credit users will pay back the creditors. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation since the 1980's.
A credit score attempts to condense a borrowers' credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission after extensive review of this issue has ruled this to be acceptable.
So what does a FICO score have to do with you? Well, believe it or not, you have a FICO score calculated on you based on information reported to three separate credit reporting organizations. These organizations are called ‘Credit Bureaus' The names of these Bureaus are: Experian, TransUnion and Equifax.
Each of these bureaus utilize the FICO scoring system, and calculate a single number that is your credit score. These Bureaus receive their information from creditors that have had accounts with you, as well as collection agencies, government organizations, etc. Each of the three Credit Bureaus will often have a different number calculated on you identifying your credit score, depending on which creditor reported to which bureau. Some creditors report to all three, others report only to one or two. So the credit scores can vary between the three.
To determine a borrowers' credit score, credit bureaus analyze a borrowers' credit history. They examine many factors, including some of the following:
•· Late payments.
•· The amount of time credit has been established.
•· The amount of credit versus the amount of credit available.
•· Length of time at present residence.
•· Negative credit information, such as bankruptcies, charge offs, collections, etc.
•· Types of accounts the borrower has.
There are as many as 40 different factors that are reviewed when a borrowers' credit history is analyzed, and few know all the criteria. The credit bureaus keep the exact formulas a closely guarded secret, so there can be many factors that affect a credit score that go well beyond the scope of this blog.
The credit score is based on this secret formula that identifies the perfect credit risk to a lender. So the first step undertaken in home buying is to have a lender examine a person's credit scores to see if they are eligible for a loan under the lenders guidelines, or if they need to improve their score.
As a Realtor in Battle Creek Michigan, I often work with connecting buyers with lenders and helping them get their credit scores improved to become eligible to buy a home. For more information on this, call me directly at: 269-441-8182 or contact me through my website at: www.michaeldelaware.com.
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