FICO Credit Scores and Increasing Your Creditworthiness

by Bill Gassett on March 29, 2010 · 32 comments

FICO Credit Scores and Increasing Your Creditworthiness

How to Increase a Credit Score

 

Credit scores and lending risks for a bankCredit scores are one of the largest factors that lenders use in evaluating whether or not to lend money to a borrower. Credit scores are designed to measure the risk of someone defaulting by taking into account various factors in a person’s financial history.

If you are considering purchasing a Massachusetts home one of the things you want to be sure of is the accuracy of your credit report.  The economic down turn of the last five years has vastly changed the mortgage landscape all across the country.

If you ask any mortgage broker they will tell you that things have changed in the mortgage industry on a monthly basis. Given the increase in foreclosures and short sales lenders have increased their standards when evaluating the potential for default of every borrower.

One of the tools that lenders use to evaluate the borrower to repay a loan is what’s known as their FICO score. The FICO score was developed by the Fair Issac Corporation. The company was founded in 1956 and their scoring programs are often used to assist lenders in managing credit accounts, detecting credit fraud and automating lending decisions. The FICO score is a standardized approach that helps lenders deliver decisions on loans in an efficient manner.

FICO scores can range from 300 to 850 with 850 being the maximum possible score. According to the FICO scoring system there are five factors that determine a borrowers score. Using these guidelines can help you improve a credit score!

  • 35% — A borrowers payment history carries the most weight – Late payments on bills including  a mortgage, credit card or automobile loan, can cause a consumer’s FICO score to go down. Paying your bills according to the contract you signed will over time help improve a consumer’s FICO score.
  • 30% — The borrowers credit utilization – The ratio of current outstanding debts such as credit card balances to the total available revolving credit ( your credit limit). You can improve your FICO score by paying off  debts and lowering your utilization ratio. The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on your FICO score.
  • 15% — The length of credit history – As your credit history gets longer, assuming you pay your bills on time, it can have a positive impact on your FICO score.
  • 10% — The types of credit used (installment, revolving, or consumer finance) – There is some credit given to having a history of managing different types of credit.
  • 10% — A recent search for credit or amount of credit obtained recently-  If you have multiple credit inquiries as a consumer seeking to open new credit, such as credit cards, retail store accounts, or personal loans, it can hurt an your score. Applying for lots of new credit in a short period of time is also viewed as risky and can cause a drop in an individual’s score. What should be noted however is that if you are shopping for a mortgage or auto loan over a short period of time you should not experience a decrease in your scores as a result of these types of inquiries. So if you are buying a home and apply to multiple lenders and they all do their credit checks you are not supposed to be penalized.

FICO scores do not take into account a borrowers salary, employment history, where they work, rental agreements, child support or other such obligations or interest rates on any current loans.

Generally speaking a credit score that is over 720 is often considered an excellent credit score.  A score of 680 – 719 is considered good. A score that falls between the range of 620-679 will usually make the lender scrutinize the file further. Having a score that falls between 585-619 will typically disqualify you from getting the best rates. A score below 584 will make many lenders question whether or not they want to do business with you.

There are actually three companies that report credit scores to lenders. They are Equifax, Experion and Transunion. The scoring of these agencies can often vary quite a bit. Each of the bureaus collects different information on the borrowers which can change the final score. Given how the credit scores can differ from the various agencies if you are falling on the edge of one of the credit ranges it may be prudent to apply to more than one lender. For example if you had a score of 675 at one agency it is quite possible you could be 700 somewhere else which could give you a better rate! It should be noted that the credit scoring model was slightly altered in 2009 and could effect your score either up or down by 20 points.

In the new model credit problems and issues will be ranked according to number and magnitude more specifically than before. The new FICO scoring system also focuses less on how many accounts a borrower has and more on the amount of balances carried.

The statistical models that are used for generating credit scores are subject to federal regulation. The Federal Reserve Board’s Regulation B (implementing the Equal Credit Opportunity Act), expressly prohibits a credit-scoring model considering “prohibited biases” such as race,  national origin, sex, religion and marital status. The law also states that credit-scoring models must be empirical and statistically sound. In addition, if a borrower is denied a loan based on credit, the lender must state to the specific reasons for the denial. A statement that the person did not score high enough is not acceptable. Thee reasons for denial must be specific. For example  there were too many late payments of 60 days or longer.

So how does one go about improving their credit score to get the best rates that lenders offer? The answers are actually pretty simple! Increasing your FICO score

  • Pay all of your bills on time every month.
  • Pay off all of your existing debt.
  • Unused credit cards should not be closed. This can sometimes lower your credit score.
  • Do not open a bunch of new credit card accounts in a short period of time.

A few years ago it was not uncommon to hear of mortgage brokers or credit repair companies doing what was known as “doctoring” a persons credit.

A major portion of the FICO credit score is set by the ratio of credit used to credit limit.  What was happening was they would increase the score by simply increasing your credit limit. Some of the credit-repair agencies, for a fee, would report to the credit bureaus that they have opened an account with a high credit limit. The customer could not actually use this account but it would improve the customer’s FICO credit score due to lowering the balance-to-credit-limit ratio. This is no longer allowed!

When you are starting your home search and getting your pre-approval from a lender one of the other things you should do is get a copy of your credit report from each of the three report bureaus. As a consumer you are allowed to get one free credit report each year from Equifax, Experion and TransUnion.

With this knowledge is hand you should be well armed to position yourself for the best mortgage rate possible and increasing your credit score!

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About the author: The above Real Estate information on How to improve a credit score was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out ofmany Metrowest towns for the last 26+ Years.

Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service the following towns in Metrowest MA: Hopkinton, Milford, Southboro, Westboro, Ashland, Holliston, Mendon, Hopedale, Medway, Franklin, Framingham, Upton, Grafton, Northbridge, Shrewsbury, Northboro, Bellingham, Uxbridge, and Douglas.

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{ 26 comments… read them below or add one }

Judy Rothermel March 30, 2010 at 4:59 am

Excellent post Bill. Extremly informative. I have one question though. How much are lenders taking in consideration the FICO 08 model for lending in MA?

Bill Gassett March 30, 2010 at 10:20 pm

Judy – I don’t think it really is a question of Massachusetts lenders per say or just lenders in general on what they look for as far as the credit score. I know the models were changed a bit in 2009 if that is what you are implying?

Beth Moore April 6, 2010 at 1:11 am

Bill,
A great post on credit reports, credit scores and how you can “simply” raise your credit scores.

Bill Gassett May 15, 2010 at 9:50 pm

Beth thanks for the compliments on my article about increasing a FICO score to get a better mortgage rate!

Credit Card Tips July 6, 2010 at 5:48 am

This is a really good article on credit. The three credit reporting agencies are Equifax, Experion and Transunion. The scoring of these agencies can often vary quite a bit. Each of the bureaus collects different information on the borrower.
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Peggy Chirico January 28, 2011 at 6:23 pm

This is great information and a very good resource, especially for first-time homebuyers who want to know how they can boost their credit score.

Bill Gassett January 28, 2011 at 6:58 pm

Thanks Peggy I appreciate the compliments on how to increase a credit score.

Amy F February 24, 2011 at 4:57 pm

Thanks for the great info. I will definitely pass this along!

claudia March 5, 2011 at 2:45 pm

Great Blog, very informative. The information you gathered is helpful both to first time homebuyers/ homebuyers as well as anyone who is looking to refinance their current home. Over the last years many struggled with their finances. Now that the economy appears to be taking a turn for the bettter, clients are concerned about improving their credit scores and thus their lending power. Thank you Bill, for this great information.

Bill Gassett March 5, 2011 at 3:01 pm

Thanks Claudia. Increasing a credit score is something that every borrower should concentrate on. Having a higher credit score can save you quite a bit of money in better interest rates over the years you have a loan!

Bill Gassett March 6, 2011 at 6:01 pm

Bill, Thanks for the reminder. I was looking over my credit report the other day and thinking that I should drop some of my credit cards I never use, but your post convinced me to keep the accounts open (and just shred the cards). Also, I put a temporary lock on my Equifax credit report, so no one can pull unauthorized inquiries. AT&T just did that and lowered my credit score, took weeks to get them to remove the incorrect inquiry from Equifax.

Pete Deininger March 25, 2011 at 2:55 pm

Bill,
Another great post about easy ways to improve your credit score! Thanks for sharing. This is the second post on the topic that I’ve bookmarked and will be forwarding to my real estate clients!

Bill Gassett March 25, 2011 at 5:07 pm

Thanks Pete I appreciate your compliments on how to improve a credit score.

Bob Sparn March 26, 2011 at 1:22 pm

Nice article! Great info on how to increase a credit score, I will pass along!

Bill Gassett March 26, 2011 at 3:12 pm

Thanks Bob I appreciate your compliments. Having a good credit score is so important yet may do not think about it until they are in a position to really need a great one!

Roland Winter July 30, 2011 at 1:17 am

Great job on the post Bill! This is helpful information to someone wanting to know the how to get that credit score up. I will deff be sending this one along!

Paul Donoghue August 27, 2011 at 5:51 pm

Still as timely as when you first posted … Bill, every week I see at least one customer or more who has made recent changes to their credit profile without having any understanding of the impact on their credit score. Just this week I had a customer tell me that they had scores of 785 and 751; only to find that the 785 had become 685. Fortunate for them … they were applying for one of our portfolio products, where we don’t price the loan based on credit score. If they instead had applied for a GSE eligible 30 year fixed … well it would have cost them 2.75 points or a 0.375% increase in rate. Really enjoy your posts … Paul

Bill Gassett August 27, 2011 at 7:41 pm

Thanks Paul. As a Realtor it makes a lot of sense to teach people how to improve a credit score. As you know it can make a huge difference when purchasing a home or getting any kind of loan for that matter!

Ben Jackson August 28, 2011 at 3:44 pm

Bill this has to be one of the most comprehensive articles I have seen about how to improve a credit score. You have done an outstanding job with this post. I am sure there are many people that could use this advice given how poorly the economy has remained over the last few years!

R SMELSER August 31, 2011 at 12:59 am

Hope you don’t mind answering a question. We had over an 800 credit score. I got hurt and went on disability. My wife also had to take an early retirement. We paid off all our bill except the house which we could not sell.
There was a big drop in the homes value. We put down $45,000 when we bought in 2005. Our balance on the mortgage was $145,000. Bank of America refused to help us and we could no longer afford to make payments. We were able to do a short sale but missed payments to BOA. The house sold for $89,000. The only bad thing on our credit was the short sale. Will we ever be able to buy again? Rent is twice what our mortgage payment was.

Bill Gassett August 31, 2011 at 1:13 am

R Smelser – I am sorry to hear about your financial difficulties. After completing a short sale if you work on building your credit scores back up again you should be able to buy again in two to three years. Following the advice in the article will allow you to improve your credit score. Here is an article on improving your finances after a short sale.

Lynne Reed July 7, 2012 at 5:55 pm

Bill, how do you improve your credit score after a Ch 7 Bankruptcy discharge? Mine took place 2/2012. What can I do in the meantime to rebuild to become mortgage worthy again? I have three credit cards with zero balance (only $700 total limit combined!) they are secured credit cards. I believe I can’t qualify for 3 years (2015) Thanks Bill. Lynne

Bill Gassett July 7, 2012 at 8:51 pm

Hi Lynne – You will want to have a few different kinds of debt that you always pay on time. Building back your credit scores can be done by being consistent with your payments.

John December 29, 2012 at 10:55 pm

Yes, good article, very informative. I just want to add that I believe that if you’re going to improve your credit score drastically you need professional help. For me it was certainly worth it in the end. I went through Lexington Law and was very happy with my results.

Keith May 10, 2013 at 11:56 am

Hey Bill,

I recently used myFico dot com to get my scores and reports, signed up for their quarterly reporting as well. After looking at my reports, I decided to try for a couple of new lines of credit now, so they would have time to age before I try for my mortgage in 18-24 months.

I was denied, and got my score from the creditor, it was almost 200 pts different than the one from myFICO. How is it possible to even know an accurate score? Seems like FICO is a scam to me…. if I can’t see the same score the lender sees, what’s the use? If all lenders don’t get the same score, how is that supposed to be fair to consumers?

As far as I am concerned, FICO needs to be standardized. Period.

Brad Yzermans May 10, 2013 at 3:40 pm

Good info Bill. Two common mistakes i see people making when trying to improve or increase their credit score is they pay off their collections. The damage has already been done to their credit score, paying it off will improve their credit score. Even worse is when they go into a payment schedule on a debt that is in collections. The collection agency keeps reporting the collection as current and lowers their score even more!

Also, paying off an installment loan, even if it has been paid on time, rarely ever improves a credit score. Save your money and pay down the balances on a revolving line of credit like a credit card.

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