Your Answers to how Lenders Use FICO Scores During Lending Decisions

I am an official brand ambassador for FICO. While I receive compensation for my participation as a brand ambassador, opinions are mine.

There are so many life milestones that require us to take a clear look at our finances. Some of these important moments remind us of how important our credit is during decision making processes. From understanding how student loans may affect our FICO Score, how mortgages are calculated, or even becoming more knowledgeable about how FICO Scores are used when we’re on the search for a new car, this can be a lot to digest.

Let’s get started.

CREDIT CARDS AND STUDENT LOANS:

How do student loans affect my FICO Score?

Student loans reported to the credit bureau are considered in a FICO® Score calculation. Information such as the date the student loan was opened, payment history and balance can all factor into the score.

How do student loans that are in “school status” affect my FICO Score?

By “school status”, we assume you mean in a deferred status.  Deferred student loans reported to the credit bureau are still considered in a FICO® Score calculation. Reported information, such as the date the student loan was opened, payment history (e.g., missed payments) and balance can all factor into the score.

If I close a credit card that I’ve had for over 10 years, will it affect my FICO Score? If so, why does this happen?

It depends on the information pertaining to the credit card being closed as well as the other information in your credit report. If you see a decrease in your score after the closed account is reported, it may be due to a corresponding increase in your revolving utilization percentage.

For example, assume you have two credit cards with the following information being reported:

                             Credit  

                              Limit                      Balance

Card 1                  $4,000                  $2,000

Card 2                 $4,000                   $0

                              $8,000                   $2,000

Your total revolving utilization = 25% ($2,000/$8,000).  You then close down card #2.  The credit limit associated with card #2 is no longer considered which results in an increased revolving utilization percentage = 50% ($2,000/$4,000). Data consistently shows that higher revolving utilization equates to higher risk.

It often appears that when I reduce my credit card balance, my FICO Score goes down. Is there a reason why this could be happening?

It could be happening for a variety of reasons.  For example, other reported information on the credit report could be impacting the score. If the credit card balances are reported as $0, that can be assessed as slightly more risky versus carrying very small balances.

MORTGAGE:

How are mortgages calculated?

The 3 key factors that you should be aware of before you apply for a mortgage are as follows:

  1. Your FICO® Score – one of the most important factors in your home loan application is your FICO Score. The score provides lenders insight into how likely you are to make your loan payments as agreed. In addition, your FICO Score will influence the interest rate offered and terms and conditions for your mortgage loan. It is important to check your credit report and FICO Score before you begin the application process to help assure yourself that the credit bureau information is correct.
  2. Loan to Value (LTV) – the down payment you make on the purchase of the house influences not only your loan amount but also a key risk metric which is the calculation of the ratio of the loan amount to the appraised value of the house or LTV. Lenders have different polices about the LTV that they are willing to accept and whether a particular LTV may require additional mortgage insurance and be considered more risky.
  3. Debt to Income (DTI) – purchasing a home is generally the largest investment most consumer’s will make, so it is important to understand your ability to successfully take on additional debt.  Your debt to income ratio is all of your monthly debt payment divided by your gross monthly income. This measure is one way that lenders measure your ability to manage the payments you make every month successfully. Evidence from studies suggest that borrowers with higher debt to income ratios are more likely to run into trouble making monthly payments.

Remember that not all banks have the same credit policies so it is important to shop around for the mortgage that best meets your needs.

How am I able to view the score that lenders will use if I’m on the search for a mortgage loan?

It is important to check out both your credit report and FICO® Score from all three credit bureaus (Experian TransUnion and Equifax) as mortgage lenders may request information from all three.  Data may differ across the three credit bureaus due to differences in timing of reporting or furnishers potentially only reporting information to one credit bureau.  An easy way to check out the FICO Scores that your mortgage lender is likely to obtain is to visit myFICO.com.  The credit report products include the FICO Score versions most commonly used in mortgage, auto and credit card lending decisions.

AUTO:

Is there a way to determine what specific credit score is being used when I attempt to get an auto loan?

There is not a single list or source that informs consumers of which credit bureau and FICO® Score version a given auto lender/finance company is actually using. The best way to understand what score a lender uses, is to ask the lender.

Do auto lenders use the same credit score as other lenders (mortgage lenders, credit card companies, etc.)

The score most commonly used for auto origination is the FICO® Auto Score, which is fine-tuned to predict the likelihood of a consumer going 90 days past due on an auto loan over the next 24 months. This score has a slightly different range (250-900) than the base FICO® Score (300-850).

To learn more about financial wellness and credit education, visit myfico.com

 

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About

The Finance Bar is a personal finance suite helping women and couples achieve financial wellness through coaching, education, and an innovative learning hub on wheels. Creator Marsha Barnes is a Certified Financial Social Worker, Official FICO Brand Ambassador, and was named the 2018 Best Money Expert in the Net-Worth Category.

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