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What Is a FICO Score and How Does It Affect My Mortgage Loan?

FinanceLegacy

In the late 1950s, Fair Isaacs and Company was among the first companies to develop and implement credit scores. Hence, "FICO" became the popular acronym for their credit scoring system. Today, Fair Issacs credit scoring is behind the scores you see from the three primary credit agencies: Experian, Equifax, and TransUnion.

FICO credit scores can range from 300 to 900. This tells lenders how good or bad a risk you are when it comes to lending you money. Can You Get a Mortgage Loan If You Have Bad Credit? Your FICO credit score depends on a number of different factors, including:

  • Length of your credit history
  • Late payments, missed payments, and underpayments
  • Amount of available and used credit
  • Employment history
  • Number of credit cards issued
  • Loan history
  • Any negative credit information

Much like SAT scores are significant when applying for college, FICO scores are important when shopping for a mortgage. A low score, such as 500, could result in much higher interest rates, points on your loan, or having your application rejected outright. Conversely, an 850 would get you the lowest rates, no points, and a low down payment.

But if you have a FICO score of 650 or higher, you will get low rates on your loan and probably not have to worry about paying points (unless you choose to). If your score is 600, you will get a slightly higher interest rate, and your lender may ask you to pay a point. Different lenders will evaluate scores in different ways. Should You Pay Points on Your Mortgage?

Having a good FICO score can save you thousands of dollars over the life of your mortgage. Here are some tips to improve or maintain your score.

  • Pay off credit card bills in full each month.
  • Don't open and close credit card accounts often.
  • Maintain two or three of your oldest credit card accounts, and try to increase the credit limits on them.
  • Do not "max out" your credit cards.
  • Get copies of your credit reports directly from the three major credit bureaus at least once a year, and definitely before you go mortgage shopping. Review them carefully for mistakes, and resolve any inaccuracies as quickly as possible.
  • If you have some debt, try to pay it off as quickly as possible. Moving it around looks suspicious.

Raising a low credit score will take time, because you need to prove that you can handle debt responsibly over time. Therefore, don’t expect that you can raise a 600 to a 700 in a matter of weeks. While good lenders will look at more on a credit report than just a number, the FICO credit score is an important starting point for lenders to evaluate the level of risk you pose.