First of all – what is a FICO score?
A FICO credit score can be generated for anyone with at least one reported credit tradeline
(car loan, store card, credit card) in the past 12 months and is based on data from the three credit bureaus:
Equifax, Experian, and TransUnion. All three bureaus generate a separate credit score, each being slightly
Payment History: late payments, tax liens, bankruptcies, etc.
Accounts Owed: outstanding balances on accounts
Length of Credit History: the longer your history, the better
New Credit: inquires/applications for new credit accounts
Credit Mix: the mix of credit cards, retail accounts, loans, etc.
Tips to Increase A FICO Score
1. Check the name, address, SSN, and all public records entries on the report for accuracy
2. Make sure all the tradelines show up only once and belong to the borrower
3. Allow negative data to ‘season’ through time thresholds (e.g. 6 to 12 months)
4. Reduce outstanding balances on revolving debt to 25% of the allowable high limit.
5. If there is NO positive credit, open ONE secured or regular credit card, charge ONE tank of gas each month and then pay it off to $10 ONCE THE BILL COMES IN.
3 Common Myths on Credit Scoring
MYTH: Paying off credit cards, collection accounts, tax liens, etc. will always increase the FICO score
FACT: The FICO model score reflects updates from “Date of Last Activity,” so paying off an old collection account can count against your borrower
MYTH: Closing accounts with zero balances will increase the FICO score
FACT: Closing accounts can raise the overall credit utilization, which can end up decreasing the FICO score
MYTH: Public records, judgments, liens, etc. negatively impact the FICO score forever
FACT: Most are removed from a credit file after 7 years (10 years in California)
>> FICO scores can range from 300 to 850 under the following categories:
Did You Know?
What causes a “No Score” from one or more of the bureaus?
There could be 3 main causes:
1. There’s not enough information in the borrower’s credit report to calculate a score
2. The borrower’s file has not been updated by a creditor within the last 6 months
3. 2 out the 3 identifying elements to access the file don’t match the bureau’s database
How Do I Correct Errors?
- With proper documentation from your borrower, use IR’s Credit Rescore service to update any errors and get a new credit report in as soon as 24 hours
- The borrower can contact the credit bureaus directly to correct any errors
- Informative Research can initiate a credit dispute process with the bureaus on behalf of the borrower free of charge; this usually takes 30-40 days
What are some positive and negative impacts on a credit score?
Paying bills on time
Low balances compared to maximum credit available
Positive credit management over the past 2 years
Delinquent payments and collections
Opening too many accounts in a short period of time
High total outstanding debt and derogatory public records
How do mortgage lenders use a credit score?
Lenders use credit scores to predict how likely a borrower is to repay a new debt based on past credit behavior. FICO scores are also used to determine the type of mortgage, costs, and interest rates.
Why do scores obtained by the consumer often differ from those on a lender’s credit report?
There are no regulations that state a specific score must be displayed to the consumer, so different entities can choose which score they want to display from the multiple bureau options available to them. On the other hand, lenders are required to pull a specific score for mortgage lending so there’s consistency when making a lending decision.
If you appreciate the value of this blog, please forward it along to a friend who has an interest in the real estate market.
Have a great week!