What is FICO scoring?

You may have been asked or asked the question “What is FICO scoring?” FICO scores are used by lenders to pre-determine the type of credit risk you are expected to be. The score is a numeric value of all the information in your credit report. FICO is an acronym for Fair Isaac Co. which was the company that founded the system. Scores range from 300 to a high of 850. Scores from 620 and higher are considered “A” grade paper. Scores lower than 620 are considered “B” grade paper. If your score is over 740 you will qualify for the best rates and terms. “B” paper would mean that you would have to pay a higher interest rate and very likely would need a larger down payment. Certain loan programs would not even be available for low scoring people.

The FICO score is based on numerous events that are considered an accurate reflection on and predictor of your creditworthiness. The exact criteria used, and the “points” assigned for each item, is a closely guarded secret. However, we do know of several things that are considered in the scoring process: Payment history, late payments, collections, bankruptcies, number of credit cards, the amount of credit used up on the card versus the credit limit, number of times you have applied for credit or checked your score, length of time at current residence, total credit outstanding and other facts. Contrary to common opinion, it is not based on income.

Unfortunately, it is not unusual to find errors in your credit report. In order to fix those errors and the subsequent FICO score that will be generated, I recommend that you meet with your lender early in the home buying process so a credit report can be pulled, and any errors corrected. It is not at all unusual to see it take several months to get errors fixed. There are 3 main credit reporting agencies. They are Experian, Equifax and TransUnion. Your lender usually takes what is the FICO scoring i the middle of the three.