Credit scores have figured themselves into much of Americans’ personal finance. They are one of the primary requirements for applying for mortgages, personal loans, and credit cards. Some jobs may even check them to verify an applicant’s sense of responsibility and accountability.
But how much do Americans know about credit scores, particularly FICO? How does the score affect the application process, such assecuring VA loans?
What Is a Credit Score?
To understand the FICO score is to know what a credit score is, in general. This is a three-digit number representing a person’s capability to pay off financial obligations, such as utility, credit cards, and home loans.
Many factors affect the actual score. These include payment history, age and kind of credit, total balances and debt, available credit, and recent credit inquiries and behavior.
But playing a significant role is the credit report. Three credit bureaus can provide that to every American: TransUnion, Equifax, and Experian. The report displays a comprehensive list of the person’s credit history:
- Public record information that may eventually affect the credit score, such as bankruptcy filings and foreclosures (these records can remain in the report for years)
- Agencies assigned to collect the repayments
- Credit accounts, which can range from student loans to auto and home loans, credit card transactions and balances, and credit issuers
- List of companies or individuals that might have requested for the credit report (e.g., banks, credit card issuers, and even credit bureaus)
Based partly on the information of the credit report, various agencies can then formulate the credit score. This explains why the numbers can vary.
First, the three bureaus can provide their respective scores. The Equifax credit score can be between 280 and 850, with the highest number being excellent or the most ideal (but the most difficult to achieve). Experian provides the Plus Score, and the score can be between 330 and 830.
There’s also the VantageScore, which the three bureaus developed in 2006. It shares a lot of similarities with FICO, including the bases for the scores and the range.
However, instead of giving a percentage per factor, it measures its influence on the score. For instance, payment history weighs the most among all factors, being labeled as extremely influential. Meanwhile, the percentage of credit limit used and the age and type of credit are only highly influential.
Then there’s theFICO score, which is probably the most popular of them all. According to it, over 90% of mortgage lenders use it.
What Is a FICO Score?
FICO stands for Fair, Isaac and Company, a data analytics firm based in California. The company already existed as early as the 1950s. However, it wasn’t after around 30 years that it launched the FICO score to determine a person’s creditworthiness.
A FICO credit score usually ranges from 300 to 850. The ideal score is between 670 and 739, although it still depends on the lender. For example, those that offer VA loans can accept low credit scores.
The score is also according to the percentage of influence of every factor. Like VantageScore, payment history is the most vital. It represents about 35% of the total score. Following it are the accounts owed at 30%. The credit portfolio or mix and the new credit account for the lowest percentage at 10%.
Over the years, it also went through major changes or updates to its mathematical methods. For example, the newest ones, FICO scores 9 and 10, already included adjustments to rental history and medical collection accounts.
Some lenders stay away from the earliest versions since they were less forgiving on uncollected debts. The credit bureaus, though, which also use FICO scores, may opt for the earlier versions like Experian, which sticks to FICO 2.
However, because lenders’ metrics and requirements can differ, FICO can customize their mathematical models and factors according to industries. This is why mortgage lenders prefer it over other kinds of credit scores.
For borrowers, this information means that the credit score they know may not be the actual number the lenders have on them.
What Are the Implications of the FICO Score?
The FICO score isn’t the only factor that affects a loan application, and some with lower numbers can still secure a conventional or VA mortgage. There’s also a down payment, the applicant’s debt-to-income ratio, and source of income.But since the score reflects a person’s creditworthiness, it can affect the amount the borrower can be approved of. A lender may ask for more expensive collateral, charge a higher interest rate, or add a bigger closing fee to those with lower scores.
