by Dennis Beranek, Denver Mortgage Expert
As a long-time Denver mortgage banker, I know how important credit scores have become over the years. When I started in banking, I was taught to examine the financial statements, the business plan and then look the potential borrower straight in the eye. I could usually assess a good risk from a bad one. But, those days are gone.
For better or worse, a credit decision now usually rests on what is supposed to be an objection and unemotional number. That number is FICO credit score. So, know what it is and how to improve it can save you a lot of money.
Use the form below to get more information on current interest rates and FICO credit scores.
Knowing your FICO credit score before applying for a loan will save you time and money. With the mortgage industry rapidly changing on a daily basis it is important to have all your finances in order. The new FICO formula, factors in financial information that could raise or lower your credit score. Banks, mortgage lenders, government agencies, retailers, insurance companies and credit card companies use the Fair Isaac guide lines (FICO credit score) in analyzing credit and loan requests. The following information was compiled by my.FICO.com, a division of Fair Isaac Corporation.
What is a FICO Credit Score
When you apply for a loan or credit card, lenders determine what type of risk they are taking when loaning you money. The majority of lenders use FICO credit scores to evaluate how much of credit risk you may be. They normally will pull three credit bureaus. The bureaus they use are Trans Union, Esperian and Equifax. Each company produces a FICO score that is based on the credit information it has compiled in your file. Over time, as the information changes, your FICO score will adjust as well. Your three FICO scores will determine the amount a lender will loan you, what the interest rate is and what the term of the loan will be. The better the FICO credit scores, the better rates, term and dollar amount you will receive from a lender.
How To Save Money With Higher FICO Scores
The higher your FICO scores the less you can expect to pay for your loan. See for yourself. Interest rates accurate as of February, 2008 for Colorado:
For example, on a $250,000 30-year, fixed-rate mortgage:
FICO Score Is Interest Rate Is Monthly Payment Is
760 – 850 5.302% 1,389
700 – 759 5.524% 1,423
660 – 699 5.807% 1,468
620 – 659 6.615% 1,599
580 – 619 8.488% 1,920
500 – 579 9.154% 2,039
As you can see in this example a person with a FICO score of 760 or better will pay $210 less per month for a $250,000 30-year, fixed-rate mortgage than a person with a FICO score of 620 – that’s a savings of $2,520 per year. You can see how essential improving your credit scores can be if they are low, and also how important it is to keep them high if they are good.
It is important to know that improving your FICO credit score takes time. You can not wave a magic wan and immediately improve your credit. It takes time, determination and willpower to raise your FICO credit score.
How To Improve Your FICO Credit Score
Not making your payments on time and having collections can have an adverse affect on your FICO score. If you have collections on your credit report, it will not be removed for seven years. Make your payments on a timely basis and your FICO score will improve over time. Try to keep low balances on credit cards. Paying down your revolving credit will improve your credit score.
Avoid opening a lot of new accounts if you have minimal credit experience. This will give the appearance that you are an unsafe credit risk. Creating new accounts will affect the average account age and in turn lower your credit score.
When you are shopping for rates on a loan, you should do it in a timely manner. FICO scores can be affected by the number of credit inquiries when shopping for
a loan. You may check your own credit and FICO score. This should be done directly through a credit bureau or a company that is authorized to make credit reports available to customers.
Individuals who have no credit cards are looked at being a higher risk than the individuals who have handled their credit card obligations in a responsible manner.
If you have any questions about this or any other mortgage question, please contact me on the form below or give a call, toll free, at 877-378-8213. I have been in the banking business for over 25 years and I can answer about any question.