The FICO credit scoring system has been widely used since 1989. Since then the parameters in which FICO arrives at a certain number for an individual credit score have changed to help give a more precise assessment of a person’s credit history. This summer the FICO credit scoring analysis will be changing again.
The newest version of FICO scoring will be called FICO Score 10 and FICO Score 10 T. FICO Score 10T will work from a trended data model using a wider scope into the credit user’s history and financial payment actions. It will look at how a consumer uses their money and their available credit.
Here is what FICO Score 10 T specifically looks at:
- Credit habits of the consumer
- How a consumer uses their income to address their outstanding debts
- Looking for established trends by looking at how account payments have been made over the last 2 years
- Any delinquencies will be weighted heavier than with previous scoring systems
- The longevity of credit history the consumer has
- Any personal loans a person holds will carry heavier weight and considered
- The ratio of debt used as compared to available credit
- The variety of credit being used
Now a person’s score will be dependent on how they have managed their payments and using the amount of credit available to them in the recent past. So if a consumer has been diligent with making payments on time and kept their credit balances on the lower end of their limit their FICO score will see a boost. Consumers with late or delinquent payments and high credit balances will most likely see a drop in their score.
A new model of FICO scoring could lead to consumers receiving different credit score results from each place their credit is checked. The older FICO scoring systems are still available and still in use. It is very possible that lenders still utilizing older FICO scoring systems will pull up a slightly higher score. Not all lenders will be using the new FICO 10 scoring system until it is absolutely required by Fannie-Mae and Freddie-Mac.
Because of the number of older scoring models still being used, it can be easy for consumers to be confused or even frustrated when one company says their credit score is at one number and another company says something different. It can be difficult for a consumer to determine what exactly is their true credit score. It is not uncommon for mortgage applicants to ask why someone else gave them a different number when their credit is first pulled in the application process.
The most important credit scores and reporting process to pay attention to are the ones that your mortgage broker or lender will be used to help secure a mortgage. To help determine what those scores will be it is important for a consumer to get ahead of the game and have a good knowledge of their score and credit report.
How to Know Your Credit History and Score Before Applying for a Loan
- Look at your credit report far before loan application. Looking 6 months to a year in advance is recommended.
- Obtain your free credit report from online sources like annualcreditreport.com
- Don’t just look at your score, go over every detail of your report and look for any errors.
- If there are errors you will want to report them right away to have them corrected. It is not uncommon for someone’s report to have at least one error.
- If you have a high ratio of outstanding debt, focus on paying things down to reduce the ratio.
- Reduce spending as much as possible.
- Make sure all bills are being paid on time.
- Refrain from applying for any new credit.
- Hold on to old accounts do not fully close them out.
- Continue to maintain good credit habits.
- Have a preliminary conversation with a mortgage broker to talk about what you are doing and can do to prepare for the application process.
By having a solid knowledge of your current financial health, and planning and preparing the credit scoring model a lender uses will not matter. Knowledgeable preparation will help you to successfully attain a home loan.
For more information on the mortgage application process and current California mortgages available to you please contact me anytime.