What is a FICO score? How do I get a higher FICO score? Those are common questions all real estate investors want to know, let's see if we can answer them below and help you improve your FICO score and overall credit rating. After all, with a better FICO score you can get a better interest rate on a loan.
Once a year you can get a FREE credit report with your FICO score from each of the major credit agencies. So, to start, request your FICO score and credit report from each of the credit agenices below. The three credit agencies are listed here:
- Equifax (800) 685-1111
- Trans Union (877) 322-8228
- Experian (888) 397 3742
Your FICO score is also known as your credit score and will help lenders determine what interest rate to give you. If your score is low, you’ll be considered a high risk by the lender and might even be denied a loan all together, or instead be forced to pay a very high interest rate on your loan.
Put in other words, a FICO score allows lenders to predict if you will pay your bills and are worthy of receiving a particular loan or line of credit. Lenders are able to analyze a borrower's credit history by taking several factors into consideration:
- Late payments
- Length of credit history (i.e. how long you’ve had a credit card or account)
- Ratio of credit used versus available credit
- How long you have lived at your current home
- Employment history
- Bankruptcies and collections within your credit history
- Recent credit history which is more important than past history. This means that late payments from one month ago weigh more heavily against your profile than those made two years ago.
Your credit score isn’t actually calculated by a person but rather through a "scorecard" preprogrammed into a computer. Because creditors and lenders are unable to see the scorecard, they don’t know exactly how your score was calculated. All they see are the final scores.
However, be forewarned. Creditors and lenders do have an idea of where the most weight is placed in determining your score. Presented below is a percentage bracket that that will give you an idea of how each of your credit performances is weighed against each other (sourced from About.com Housing).
- 35% - Your Payment History
- 30% - Amounts You Owe
- 15% - Length of Your Credit History
- 10% - Types of Credit Used
- 10% - New Credit
You can get your credit score from one of three major credit reporting agencies, or “credit bureaus,” in the US: Experian, Trans Union, and Equifax. Although you might be content with a score from a single bureau, some people suggest that you should get a score from all three. Your score will vary slightly according to the agency you select, because each bureau places a slightly different emphasis on each qualifying factor. Although scores can range between 365 and 840, it’s best to strive for 720. If it’s below 600, you may see a frown on the lender’s face!
Depending on your score, each lender will review your loan package according to slightly different criteria. Here’s a general guideline that may help you to interpret your own score, and how a lender might approach your loan request:
- above 680 – very basic review
- 640-680 – demands more thorough underwriting
- below 640 – extremely cautious approach
- below 600 – many lenders won’t even consider you
Credit scores can also influence how much you pay for a loan. It’s common for lenders to establish a "base price" and then reduce the points (a point is equal to 1% of the loan amount) on a loan if your credit score is above a certain level. To illustrate, let’s look at the following example. If your credit score is greater than 725, some lenders may reduce the cost of your loan by a quarter point. But if your score is between 700 and 724, they will reduce the cost of the loan by one-eighth of a point.
But always keep in mind that FICO scores are only guidelines. There are other factors that affect a lender’s underwriting decisions, which are called “compensating factors.” These can make an underwriter look at lower FICO scores with more lenience and might therefore grant you the same benefits enjoyed by people with high FICO scores. A few of these compensating factors could be a large down payment, an excellent history of saving money, low debt-to-income ratios, and several others.
Also, if an item on your credit report negatively affects your credit score and you have a reasonable explanation for it, then speak up! This is another great example of a compensating factor that could get you excellent rates!
FACT: A loan on a home is your responsibility and is determined by your earning power (e.g. salary, assets, other investments, etc.). A loan for an apartment complex is based on operating income (rent, parking, laundry, etc.).
Now that you know how important your FICO score is, you’ll need to improve your credit if you think or know that your credit is deficient. To get ideas on how to do this, check out the following page for useful tips Improve Your Credit Score.
TIP: Your FICO score is a monthly variable that fluctuates according to your profile. Most credit cards offer this valuation to their customers within their online account.