What is a Credit Report and FICO Score?

One of the keys to getting a mortgage is your credit report and FICO score. A credit report is a compilation of your credit history. Typical things that are compiled on a credit report are:

• Job history (for employers mainly)

• Current and previous addresses (landlords look at this when deciding whether to rent to you)

• Outstanding loans (installment loans like car loans)

• Amount owed on each loan

• Credit card information. This is revolving credit. This will include credit limit on each credit card and amount owed on each card.

• Number of times you have applied for credit.

• Available credit.

• Mortgage information.

All this information is compiled. Then, based on this information, you are given a score which creditors look at to decide whether or not to give you a loan. The score is a numeric expression of your creditworthiness.

Credit scores are determined by weighing the different elements of a credit report. There are different types of credit scores and each is determined differently. The score that a lender looks at to determine creditworthiness will depend on what kind of loan you have chosen. For a mortgage loan, the credit score mortgage lenders look at is the FICO score.

FICO stands for Fair, Isaac and Company. Bill Fair and Earl Isaac founded the firm in 1956. This company created the credit rating system that is used by all mortgage lenders today to determine creditworthiness—the FICO score.

The FICO score takes these things into account to determine your credit score:

• Credit history

• Number of open accounts

• Loans

• Mortgages

• Public records

Each of these factors is weighed differently to produce a score ranging from 300 to 950. If your FICO score is over 680, then you are considered a low risk borrower and you will probably qualify for the best interest rates. Below 680 means that you are a medium credit risk, and if your score is below 560, you are considered a high credit risk.

How a FICO Score is Calculated

The question now is how a FICO score is calculated. Knowing how the score is calculated can help you to better understand how to improve your credit score. Below are the different parameters that govern FICO score calculation. You will see that each is weighed differently.

• Payment History (35%)
  This includes your payment history from ALL your loans. This is the most important factor in determining your FICO score. If you have no late payments, then your score will rise. But one late payment can make your FICO score go down dramatically.

• Outstanding Balances (30%)

This is the amount of money that you currently owe on your loans. This is the debt to equity ratio. If you have high outstanding balances, this will cause your score to go down. One thing you should know is that even though you pay off your credit cards every month, a balance still shows up.

• Length of Credit (15%)

Credit history is important. Generally, they like to see at least a 30-year credit history. Most people do not have such a long history, but the axiom is the longer the history, the better.

• Pursuit of New Credit (10%)

Every time you apply for credit an inquiry shows up on your report. This tells potential lenders that you are seeking new credit. If there are too many inquiries in a short period of time, it might raise a red flag because people who are looking for new credit might be seeking to go into debt. One exception to this is people who are looking to get a variety of quotes for auto loans or mortgage loans. FICO takes this into account and treats it as 1 inquiry. So, this kind of inquiry will not cause your score to go down if you have many on your report in a short period of time.

• Types of Credit Experience (10%)

It's good to have a healthy mix of credit: credit cards, installment loans and mortgages.